US Dollar: The Good News And The Bad New

Daily Forex Fundamentals | Written by Global Forex Trading | Aug 21 08 01:36 GMT |

Today's Biggest Percentage Movers

* USD/CHF ( +85 pips or 0.80%)
* CHF/JPY ( -60 pips or 0.60%)
* NZD/USD ( +83 pips or 0.48%)

The Stories in the Currency Market

US Dollar: The Good News and the Bad News

The last 2 weeks of August is always a painstakingly quiet time in the currency market. European traders are off on their month long holidays while US traders are more worried about taking their kids to college and planning for the Labor Day holiday than taking on risk. The consolidation that we have seen in the currency market over the past few trading days is evidence of the declining volume in the marketplace. After selling off yesterday, the greenback has recovered against all of the major currencies. Stocks have been unusually volatile as oil prices oscillate between positive and negative territory. The biggest story in the markets this week is the problems in the financial sector. Fannie Mae and Freddie Mac shares continue to get pummeled as the market continues to discount the possibility of a government bailout which would be good for economy and eventually the US dollar but not so good for Fannie and Freddie shareholders. Yesterday, Freddie issued 5 year notes at 113bp over Treasuries, which is a higher premium than their cost of borrowing after the Bear Stearns debacle in March. This indicates that credit concerns are still running high across the financial markets. However there is hope. The US government is not going to just let Fannie and Freddie die. Recent comments from the Treasury and the Federal Reserve indicate that they are keeping a close eye on the 2 big mortgage giants. The FDIC has also announced a rescue plan for IndyMac mortgages which will certainly help thousands of homeowners. Also, there is talk that China is considering a fiscal stimulus package. As the primary engine for growth over the past few years, this would be huge for the financial markets. One of the greatest fears has been a post Olympic slowdown, but a fiscal stimulus could keep the Chinese economy and by extension, the global economy going. We are also closely watching the retail sector. Earnings have been tepid suggesting weak retail sales this month, but retailers are pulling out all the stops with General Motors extending warranty and relaunching their previously successful employees discount program while eBay is making changes to their fee structure to boost fixed price sales. The dollar could extend its gains tomorrow with the Philadelphia Fed index and leading indicators due for release.

Data Call on the Philadelphia Fed index and the Leading Indicators Report (14:00 GMT): Dollar Bullish

British Pound: Could be in for More Losse

The British pound could be in for more losses ahead of Thursday's retail sales report. The market remains extremely bearish pounds after the dovish Bank of England minutes and the sharp drop in the CBI Industrial Trends survey. Although the votes remained the same from the last meeting with 7 members favoring no change to interest rates, 1 member voting in favor of a rate hike and 1 member in favor of a rate cut, BoE Governor King's prediction that inflation will slow to below the central bank's 2 percent target in 2 years is a lean towards dovishness. The UK economy is deteriorating and there is no doubt that it has also hit the consumer sector.

Data Call on the UK retail sales number (8:30 GMT): British Pound Bearish

Euro Heads Back Towards 6 Month Lows

The Euro headed back towards its 6 month lows on broad dollar strength, bearish comments from the German government who said that the outlook for the economy has worsened and the prospect of weak Eurozone economic data. The purchasing managers' index for Germany and the Eurozone as a whole are due for release Thursday morning and given the drop in exports and factory orders, there is a greater chance that the manufacturing and service sector PMI numbers will surprise to downside than the upside. The Eurozone economy is in a downward spiral with the market now pricing in 1 to 2 quarter point rate cuts over the next 12 months.

Data Call on the Eurozone PMI Report (8:00 GMT): Euro Bearish

Strong Data Fails to Help the Commodity Currencies

There has been no big action in the Canadian, Australian and New Zealand dollars despite stronger economic data. Canadian retail sales excluding autos doubled expectations thanks to stronger spending on clothing and gasoline purchases. However the rally in the Canadian dollar did not last because on a volume basis, spending has declined. This indicates that the economy is slowing but not at a severely rapid pace. Consumer prices are due for release tomorrow. The data is difficult to call because despite the drop in the price component of IVEY PMI, industrial product and raw material prices increased. Technically, USD/CAD is prime for a turn. Keep an eye on that 1.0542 level. Meanwhile Australia reported stronger leading indicators, which has helped to keep the currency above water. The New Zealand dollar on the other hand is continuing to struggle - credit card spending is due for release this evening.

USD/JPY Advances, Japanese Yen Crosses Mixed

The Japanese Yen crosses were mixed with USD/JPY rising but pairs like CHF/JPY and GBP/JPY slipping. Despite the 68 point rise in the Dow, carry trades are still struggling. The Merchandise trade balance is due for release this evening. The market is expecting stronger numbers.

GBP/USD: Currency Pair in Play Over the Next 24 Hours

The marquee tomorrow is the UK retail sales report (8:30 AM GMT)

The currency pair that I am watching the most closely over the next 24 hours is the GBP/USD. It is trading within the Sell Zone, which is established using Bollinger Bands. The key levels to watch are 1.85 and 1.8830. A close above 1.8830 would negate the current downtrend. Since we expect weak UK numbers and strong US numbers, the 1.85 level could be challenged.





Kathy Lien
Global Forex Trading
http://www.gftforex.com

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