The Greenback (USD) traded mixed last week, closing higher against the Euro (EUR), Sterling (GBP), Canadian Dollar (CAD), and the Australian Dollar (AUD), but lower against the Yen (JPY) and New Zealand Dollar (NZD). Though the Federal Reserve issued a more optimistic outlook on the economy, economic data suggest the US economy could still be under pressure.
Hussein Sayed, Financial Analyst ACM Middle East & Asia
Existing and new home sales in August were both disappointing, with the former dropping by 2.7%, far below the expected 2.1% increase, whereas the latter produced only slightly better results, rising 0.7% but still below the hoped for 1.6% increment.
The durable goods orders report on Friday was also disappointing with a drop of 2.4% after gaining 4.9% in July.
However, the consumer confidence index showed that sentiment improved greatly in September posting a 21-month high of 73.5.
The coming week is expected to be volatile with the release of some new economic data, which should give a better picture of the US economy and indicate whether it is headed out of recession.
Will the USD respond this time to fundamentals, or will risk the appetite/aversion theme continue to prevail in the market? The coming week should provide some answers. Though we have seen some improvement, the dollar is still looking oversold, and the USD Index needs to break above the 77 resistance level to sustain strength against its major counterparts.
On Tuesday, US consumer confidence is expected to rise to 57 from 54.1 in August. The following day, the final US Q2 GDP estimates will be released, and it is expected to be revised down to 1.0% from 1.2%.
Then on Thursday, the ISM manufacturing index for September is projected to increase to 54 from 52.9 in August. And finally on Friday comes the godfather of economic indicators, the non-farm payrolls, which have always been the biggest mover for the currency market, and will most likely see a drop of around 187,000 jobs. This will be the smallest decline since the beginning of the financial crisis, with unemployment rate projected to only slightly increase by 0.1% to 9.8%.
Sterling drop
The British Pound (GBP) was among the biggest losers last week, dropping 1.8% against the Dollar to bottom at 1.5914. The pound was pressured by comments from Bank of England (BoE) Governor Mervyn King who said that the sterling's weakness would help rebalance the economy and help exports.
Another factor that contributed to the UK currency's drop was the cut in the deposit rate paid to banks that hold their capital with the BoE. Sterling remains under pressure and will have to wait until after BoE's next meeting in October for some reprieve if there are any changes in the bank's policy.
On the data front, the Hometrack housing survey is due for release on Sunday with the final GDP for Q2, net consumer lending, mortgage approvals, GfK consumer confidence and the monthly CBI report out on Tuesday. PMI manufacturing will be released on Thursday while the announcement of nationwide home prices will be made on Friday.
The Euro rose to a new yearly high versus the USD at 1.4843, while bears were ready to drag the currency lower as it approached the key resistance level at 1.4865 (September 2008 high). Risk appetite was the main driver for the single currency as US stocks and other risky assets climbed in the beginning of the week.
Economic releases from the Eurozone held up to expectations last week, with IFO coming slightly below predictions, but still an improvement for the sixth month in a row. On the data front, we will be having the release of the German CPI on Monday, and the confidence index for the Euro economy the day after. On Wednesday, all eyes will be on German unemployment data. We need to keep an eye on the Equity markets, as further drop will add pressure on the Euro.
The Japanese Yen was the top performer last week, gaining against all major currencies and posting a seven-month high against the dollar as Japan's Finance Minister Hirohisa Fujii reiterated his opposition to intervention in the currency markets to curb the yen's appreciation. However, a stronger yen could have a devastating impact on the Japanese export sector as some exporters could only be profitable with the USD/JPY above 95.00.
The USD/JPY closed at 89.62 on Friday and major support is seen at 87.10 (January 2009 low). The coming week's focus will be on industrial production on Tuesday, while the Tankan survey and housing data will be released on Wednesday.
