Forex daily analysis 30th August 2013

Market and analysis overview

The dollar was able to gain support on Thursday as EUR/USD dipped to lows just above the 1.32 level.

There is a US market holiday on Monday which will curb liquidity on Friday and will also increase the

potential for erratic trading conditions as month-end positioning will be compounded by the long US

weekend. With important underlying stresses surrounding emerging markets, there is a high risk of very

choppy trading conditions during Friday.

Short-term strategy highlights

Short-term strategy highlights

Erratic trading conditions will be a big threat on Friday with month-end positioning, US holiday and stresses within emerging markets.

Medium-term strategy highlights

The dollar should be able to maintain a solid underlying tone given a flow of funds away from emerging markets, but with little shortterm headway against the Euro.

increase in US yields as 10-year

There will be an important lack of liquidity over the second half of August with the peak holiday season

acting to dampen trade volumes. There will also be an important mood of cautions ahead of key political

and economic events during September which will potentially shape events for the rest of 2013. 

There will, therefore, be major caution and the potential for even more erratic market moves in the short term. The latest US labour-market data was again stronger than expected with a decline in initial jobless claims to 320,000 in the latest reporting week from a revised 335,000 previously and this put claims at the

lowest level since late 2007 and there was also a solid reading for the New York Empire index. 

There was  an increase in US yields as 10-year bond yields spiked higher following the data and the 30-year yield

moved to the highest level since the fourth quarter of 2011 at just above 3.80%.

As far as inflation is concerned, headline and core consumer prices both rose 0.2% for July which was in

line with expectations. Regional Fed President Bullard stated that there had been an improvement in the

labour market. He was still concerned that growth rates were disappointing while low inflation could also

still be a problem. In this context, he was undecided whether to back a tapering of quantitative easing at

the September FOMC meeting. The Philly Fed index was slightly weaker than expected which dampened

optimism to some extent and the industrial output data was weaker.

The Euro positioning shift and yield factors

The Euro was again confined to narrow ranges during Friday with resistance close to 1.34 and it edged lower during the US session. Technical considerations had an important influence during the day as the Euro traded close to key resistance levels just above the 1.34 level, including the 200-week moving average. The currency was over-bought on a short-term perspective following strong gains and this combination made it even more difficult to attack resistance levels.

There was further speculation that the Federal Reserve would move to a September tapering of bond purchases and there was some reluctance to sell the dollar aggressively as the Euro dipped to test support below 1.3350 later in the US session. 

The latest betting odds have increased the probability of a September Fed tapering which provided some net dollar support and comments from Fed officials will be watched very closely during this week.

The latest CFTC positioning data recorded a net long speculative Euro position against the dollar for the first time since mid June which will substantially lessen the risk of a further covering of short positions.

The overall positioning was still long dollars which will hamper the US currency even though positions declined for the third successive week. 

The Euro edged lower on Monday while holding above 1.33.

The Euro positioning shift and yield factors, allied with underlying US fundamental trends, will provide dollar support. 

A solid base for the US currency against the Euro should be in place particularly given net global reserve flows which will strongly favour the US dollar. It will still be tough going for the US currency to regain much ground in the short term given that a September Fed tapering has effectively been priced in.

This will be another important week for Sterling with the latest inflation and unemployment data due for release. Following the Bank of England forward guidance released last week, the data will be very important. Any increase in the inflation rate would increase speculation that the MPC will need to raise rates earlier than they would like to while higher unemployment would have the reverse effect. Overall, Sterling will find it difficult to make much headway in the short term.

The US jobless claims data

The US jobless claims data was better than expected with a decline to 329,000 in the latest week from a

revised 345,000 previously and this was the lowest reading for over five years. The ISM non manufacturing

release was also robust with a rise to 55.4 for July which was the highest reading since March 2011. 

There was a strong increase in orders and the employment component was also firm which

increased optimism surrounding Friday’s crucial payroll report. Any increase in the 200,000 region would

increase expectations that the Fed will taper bond purchases at the September FOMC meeting.

As expected, the ECB made no changes to interest rates at the latest council meeting with the repo rate

left at 0.50%, maintaining the focus on President Draghi’s press conference. The comments were broadly

in line with last month’s meeting with confidence showing some recovery from very low levels. 

Economic risks, however, were still described as biased to the downside. The bank remained committed to forward guidance without adopting any specific numerical thresholds. 

Draghi did comment that the rise in money market rates was not justified and that monetary policy would remain very accommodative.

The Euro briefly dipped to below the 1.32 level on the combination of better US data and the ECB pledge

for low interest rates as there was a significant recovery in US yield support to a three-week high.