Close Brothers - FX OUTLOOK 15/10/2007

Close Brothers - FX OUTLOOK 15/10/2007

The dollar stayed on the back foot after a bag of mixed US data on Friday, which saw the euro rise above 1.42 usd briefly. Even the day's stronger pieces of data failed to help the dollar, what with wider concerns about the world's biggest economy still prevailing. The dollar got only the mildest boost after strong US producer price and retail sales figures suggested that growth in the world's biggest economy may not be slowing as rapidly as some had been fearing. Crucially, there was not enough momentum behind the dollar buying and sellers soon outnumbered buyers, pushing the euro above 1.42 usd. Ahead of the data the dollar had been at 1.4175 usd. Markets were also quick to latch on to the one bit of the data which had come in below expectations, namely the core producer price index, which strips out more volatile items. Overall producer prices were double those expected while retail sales also registered a strong rise.

Against this backdrop of mixed data, attention now turns today to speeches from US policy-makers. Focus will therefore switch to a speech by Ben Bernanke, but unless the Fed Chair suggests growing concerns over inflation and greater confidence on the non-housing economy, it is difficult to see the dollar moving far from the current 1.411.42 usd range. It is unlikely that Bernanke or the other Fed speakers will comment on the current situation for monetary policy. Chances are the Fed won't give the markets a strong hint and that could clearly leave the dollar a hostage to the Fed's decision on October 31.

Meanwhile, the euro found some early support after hawkish comments made on Thursday by Germany's Bundesbank president Axel Weber, who hinted that the European Central Bank could resume monetary policy tightening if inflation risks materialise. If risks to price stability threaten to materialise, monetary policy must not lose sight of its primary mandate, even if it can thereby no longer support the already robust economy, or even restricts it.

The hawkish tone on the euro zone economy was backed by ECB executive board member Juergen Stark, who said the ECB sees no sign of weakening yet in euro zone growth despite financial market turmoil, although it is awaiting new data before making any interest rate decisions.

Elsewhere, the pound continued to suffer following Thursdays weak RICS housing market survey and ongoing talk of a large euro-sterling merger-related deal, briefly allowing sterling to break through the psychologically important barrier of 0.70 per euro.

The yen remained under pressure, as risk appetite levels in the market continued to grow amid recent strong gains on equity markets.

This morning, the US dollar shed gains against the euro and the yen, ahead of the G7 meeting in Washington this week. It's likely to be a non-event for any major currency policy, but still the market is watching if European officials will express dissatisfaction over a strong euro.

Finance ministers and central bankers from the Group of Seven industrialized countries -- the US, Japan, France, the UK, Germany, Italy and Canada -- will be meeting this week to thresh out economic issues hounding the global economy, including the subprime mortgage crisis. The dollar extended gains against the euro and the yen this morning as the higher-than-forecast September US retail sales figure released Friday was seen to have cut the chances of another Federal Reserve rate cut again this month.

Aside from the G7 meeting, the currency market will also be waiting for this week's release of September industrial production, consumer prices and housing starts in the US.

Meanwhile, the Australian dollar may come under pressure after Australian Prime Minister John Howard yesterday called federal elections for November 24. The Reserve Bank is due to meet on November 6, in the midst of the election campaign, and some analysts believe it may keep interest rates unchanged to avoid getting caught up in the political fray.
Prices at the London open
GBPUSD – 2.0338
GBPEUR – 1.4351
EURUSD – 1.4196
GBPJPY – 239.16
GBPCHF – 2.4091
GBPAUD – 2.2455
GBPCAD – 1.9797
GBPZAR – 13.7114
Have a great day!

Christopher Huddleston
Sales Trader - FX & MM

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