Forex: U.S. Dollar Weighed By Prospects of U.S. Monetary Easing

Talking Points

Japanese Yen: Under Pressure Amid Risk Appetite
Pound: Jobless Claims Tops Expectations in September
Euro: Poised to Test 1.40 On The Back of U.S Dollar Weakness
U.S. Dollar: Import Prices and Monthly Budget Statement on Tap

The EUR/USD continued to trend higher during the overnight trade on Wednesday as the ascending channel dating back to the beginning of September maintains its course. Taking a look at the economic docket during the overnight trade, industrial production in the 16 member euro area topped expectations in August as figures rose 1.0 percent after climbing a mere 0.1 percent in July. At an annualized rate, output gained 7.9 percent. The breakdown of the report showed that Germany lead the advance in output, while Spain pared last month’s decline and posted a 0.7 percent increase. The data fueled momentum in the euro as trends as of late supports and suggests that the industry will continue to push higher in the coming months. Despite today’s rise, I expect industrial production in the near term to come under increased pressure as governments in the bloc implement tough austerity measures in order to battle their budget debts.

Price action with regards to the EUR/USD has maintained its ascending channel from last month, and until we see a break and a close below the lower bounds of the range, upside risks remain. Indeed, the relative strength index remains deep in overbought territory, but it is noteworthy that the pair could trade within a congested area before pushing higher again. Not to overlook, our speculative sentiment index now stands at -1.74, and signals for additional gains. All in all, if you are not trading this pair, I would recommend sitting on the sidelines until further developments arise. However, a trader that is already long may want to keep this position open until the pair changes direction and closes below 1.3850. Looking ahead, equity futures are pointing to a higher open for the U.S. markets, and risk appetite could continue to weigh on the greenback during the North American trade.

The British pound pared yesterday’s decline and is now bounded by the 10 and 20-day SMA’s. The jobless change report was released today and figures rose 5.3K in September after climbing a revised 3.8K the previous month amid economists’ expectations of 4.5K. At the same time, the claimant count rate was unchanged at 4.5 percent, while the ILO unemployment rate unexpectedly fell to 7.7 percent from 7.8 percent in July. Despite the decline in the ILO sector, today’s rise in jobless claims pushed the total jobless claims up to 1.47 million. This fact was quickly digested by GBP traders as the British pound quickly lost steam. After testing 1.60 for the first time since the beginning of August, the pair looks poised for a correction to the downside. Some technical developments to take note of are the change in the Parabolic SAR, the MACD crossover, and the break and close below the 10-day moving average. Market participants will now shift their focus to the Bank of England’s meeting of the minutes, which will be released on October 20th. Andrew Sentance will dissent against the majority, continuing to push for a rate hike. However, it is possible that we could see a three way split as committee member Adam Posen recently expressed concerns about quantitative easing.

The greenback is down against all of its major counterparts except for the Japanese yen, with the euro up the most against the U.S. dollar as most currencies benefit against the dollar amid weakness in the world’s largest economy. The dollar index continues to maintain its descending channel that has remained intact since the beginning of September. Until we see a break above the range, downside risks remain. Heading into the U.S. trade, market participants are faced with a relatively light docket as import prices and the monthly budget statement are on tap. Tomorrow, the trade balance and producer prices reports will be released. The latter is of particular importance in that producers tend to pass on higher costs to consumers, thus the report serves as a leading indicator to inflation.