Dollar gains on European gloom

Doom and gloom out of Europe coupled with a sense that the US situation isn’t as bad as it could be saw the dollar continue to strengthen against the euro and the pound. However, the greenback’s recent rise against the yen came to halt...

The week opened to the news that the US Treasury had closed two more banks over the weekend for being undercapitalized. The price of oil also rose to $125 a barrel on Monday and although trading was quiet at the beginning of the week, these two items helped support the euro (chart 1) which reached it’s week high of 1.5767. Top US Investment bank, Merrill Lynch, waited until the New York markets had closed on Monday to announce a further $5.7B in write-downs and an $8.5B share offering.

Tuesday saw the euro falter on the opening of the European session as oil prices started to fall. US housing data offered scant hope that the US housing industry was on the road to recovery and despite coming in better than expected, it marked the steepest fall since the index was created eight years ago. However, it did little to halt the fall of the euro and when US consumer confidence came in better than expected that fall accelerated. The mood seems upbeat on the dollar and growing concerns that the euro zone is heading for a recession is offering further dollar support.

Weak European consumer confidence pushed the euro back below 1.56 whilst surprising ADP numbers showed a gain of 9000 jobs in the private sector and the euro fell to test our second forecast support level. European CPI came in as expected and showed that inflation in the zone is running at a high 4.1%. Although it doesn’t look as if the ECB has any room at the moment to raise interest rates to counter inflationary pressures, falling oil prices may do the trick and the euro held steady.

A few hours later a raft of disappointing US data saw the euro spike to test 1.57 before falling back below 1.56 against a background of falling oil prices. Friday saw German retail sales disappoint and when the much anticipated US payrolls data came in better than expected, which suggested that although the US labor market is weak, the erosion is slowing down, the euro fell to 1.5514, testing our forecast support once more. US Unemployment came in worse than expected at 5.7% which perhaps slowed any dollar advance. The euro closed the week at 1.5563.

Sterling (chart 2) saw a grim week of economic data which suggest the UK is teetering on the brink of its first recession since the early 90’s. Tuesday’s Confederation of British Industry data came in much worse than expected and painted a sorry picture for UK retail sales. UK consumer confidence also surveyed lower than expected as did Thursday’s UK housing numbers which reported house prices falling by the most in almost 20 years. Friday’s UK Purchasing Managers Index saw UK manufacturing fall for its third straight month to its weakest since 1998.
Calendar (full economic calendar)
It’s a busy week this week (chart 3) with no less than 4 central banks making interest rate statements.
In addition to the Fed’s interest rate statement on Tuesday, other significant US numbers include inflation data and Factory Orders on Monday; Tuesday’s Institute of Supply Management’s (ISM) Non-manufacturing composite and Thursday’s Pending Home Sales.

Check the rate of the euro-zone’s slowdown with Tuesday’s Retail Sales; Wednesday’s German Factory Orders and Thursday’s German Industrial Production in the run up to the ECB’s interest rate announcement. Don’t forget to give the following press conference especial scrutiny for clues to future policy.
There’s more lowdown on the UK slowdown with housing numbers, manufacturing production and the Services PMI on Tuesday. The Bank of England’s interest rate statement will be released on Thursday.

Forecast

The euro’s failure to close last week above 1.56 leaves us considering a target of 1.5380. Resistance will be found at 1.57

Sterling will also continue to be under pressure and will trade within 1.98 and 1.96.

The yen will hold its own against the dollar and we could well see a dollar/yen decline. Look for resistance at 108.50 and support at 106.

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