The US$ fell yet again overnight as analysts focus on the slew of negatives that continue to line up against the greenback. With the continued release of data showing declines in the housing sector, weakening corporate and consumer spending, and strains weighing on credit markets, traders continue to speculate that the Fed will lower rates when they meet next week. It is currently forecast with a 90.0% certainty that the Fed will lower rates 25 b.p. when they meet next week. With this rate cut all but priced in, traders continue to sell the US$ in favor of the euro. At 10:00 U. Of Michigan Confidence is to be released, expected to register 82.0, a sharp decline from last month. Consumer confidence appears to be ebbing as defaults in subprime lending markets have translated into extended weakness in the housing sector. Add to these housing woes, the continued spike in oil prices, setting new highs near $93 per barrel overnight, and the US economy seems poised to slow significantly over the next few quarters if not move into recession. With this continual flow of negative data overtaking the market, traders seem undeterred in selling the US$.
The euro continues to gain as negatives surrounding the US economy continue to build and provide a sharp contrast to the somewhat robust environment in the Eurozone. With strong economic growth supporting the euro, the market continues to speculate that inflation pressures will build, leading the ECB to hike rates before year-end. This environment of higher rates in the Eurozone, clearly differentiates the region from the US. Higher rates within the Eurozone will continue to attract investors to the euro, likely pushing the currency to new highs.
The yen remain rangebound as volatility in equity markets keep traders sidelined as they gauge the amount of risk they are willing to adopt on their balance sheets. Expect these ranges to dominate trade over the next several weeks as concerns about credit markets keep equities relegated to wide trading ranges. Overall, with the “carry trade” still being used to finance equity positions, as uncertainty pervades markets the yen will gyrate in wide ranges. Expect this pattern to continue for some time.
The pound gained slightly overnight shadowing the euro’s movements against the US$, however further gains could be ultimately limited following the release of a downbeat economic report overnight. The National Institute of Economic and Social research stated that they believe that the UK economy will grow at a slower pace next year, widening the Treasury’s budget deficit. This report follows comments from the Bank of England yesterday stating that they believe that the commercial property and financial sectors could be vulnerable to future shocks. With both of these factors as a backdrop, the market has begun to speculate that the Bank of England could soon shift gears from is current neutral policy position to pushing rates lower. Should this happen, expect sterling to decline.
