Wednesday October 27, 2004 - 09:42:37 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: ECB stance vital
Firm US data would improve the prospects of a dollar correction and the Euro is still overbought. There is, however, little immediate prospect of a sustained improvement in dollar sentiment, especially with further concerns over US growth and deficit financing. The markets will want to target all-time Euro highs, but the Euro will struggle to make headway in the very short term and also offers little immediate value above the 1.29 level.
The dollar managed to strengthen back to a high of 1.2730 against the Euro, primarily due to a correction from recent sharp dollar losses, but was unable to extend the rebound and retraced back to 1.2755 in early Europe on Wednesday.
Underlying concerns over the US economy will persist, especially with oil prices still close to US$55 p/b. The dollar has factored in no rate increase for December, but the US currency will be even more vulnerable if a November rate hike to 2.0% is not forthcoming. At this stage an increase is still likely, but the chances have dipped to near 50% and there will be further doubts if the Beige Book today reports weakening activity, employment vulnerability or low inflation.
The European events were significant with the EU Commission issuing generally downbeat forecasts on the economy and warning over a strong Euro. The ECB officials still appear comfortable with a strong Euro, but there is evidence of political concern. German Chancellor Schroeder stated that the Euro rise was a concern and that he would discuss the situation with French President Chirac. The markets will take much greater notice of the ECB and political comments will have only limited impact, but divisions between the two would eventually hurt the Euro as it would slow capital inflows.
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