Tuesday May 3, 2005 - 14:05:25 GMT
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Forex Market Commentary and Analysis (3 May 2005)
The euro moved marginally higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2875 level and was supported around the $1.2830 level. The common currency’s move higher took place during early North American dealing as traders continued to positions themselves ahead of today’s all-important Federal Open Market Committee interest rate decision. Fed policymakers are expected to lift the federal funds target rate by 25bps to 3.00% and all eyes are on the Fed’s post-meeting policy statement to see if the Fed includes the term “measured pace” to describe its removal of policy accommodation. The U.S. economy reportedly hit a “soft patch” in Q1 and core retail inflation costs are said to have picked up at the same time. Traders also want to see if the Fed believes this softer economic spell is largely transitory and how concerned they will become with accruing price pressures. Following today’s Fed meeting, the markets will begin to prepare for Friday’s April non-farm payrolls report to see how many jobs were created or lost in the U.S. economy last month. Fed funds futures prices are currently indicating around 50bps of additional monetary tightening by the Fed in 2005 following today’s anticipated 25bps hike. Data released in the U.S. today saw March factory orders up +0.1%, down from February’s +0.2% pace but higher-than-expected. Also, Challenger layoffs printed at 57,861 – the lowest level in nearly five years. Data released in the eurozone saw March unemployment rise to 8.9% from 8.8% in February. This follows yesterday’s data that evidenced the first contraction in manufacturing sector output in twenty months across the eurozone. Despite statements to the contrary from European Central Bank policymakers, International Monetary Fund Managing Director Rato said it is “premature” to rule our ECB interest rate cuts. Other eurozone data released today saw EMU-12 March PPI up 0.6% m/m and 4.2% y/y. Option traders cite a $1.2800/ $1.3200 double no-touch option that is said to run off later this month. Euro bids are seen around the $1.2830/ 15 levels while euro offers are seen around the $1.2880 level.
The yen moved modestly lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.30 level and was supported around the ¥104.95 level. Japanese financial markets were closed for the Golden Week holiday and will reopen on Friday. Nikkei cited a report of thirteen private sector think tanks today that predicts Japan’s GDP rose 0.6% in the January – March quarter for an annualized 2.5% rate. Preliminary GDP data are expected to be released on 17 May. Dollar offers are cited around the ¥105.30/ 50/ 70 levels while dollar bids are seen around the ¥104.10 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥135.35 level and was supported around the ¥134.90 level. The cross continues to orbit the technically-significant ¥134.85 level, the 23.6% retracement of the move from ¥141.55 to 132.90. The British pound and Swiss franc both lost marginal ground vis-à-vis the yen as the former tested bids around the ¥198.55 level and the latter tested bids around the ¥87.50 level. In Chinese news, traders are still pondering the possibility of China adjusting its tightly-controlled RMB peg this week during Labour Day holidays. One-week, one-month, three-month, and one-year non-deliverable yuan forwards continue to move aggressively as traders price in the likelihood of an imminent change in China’s FX policy. China’s Trade Minister Bo today said his country will adopt “an extremely prudent attitude” on this topic. U.S. Treasury Secretary Snow yesterday called on China to move to a more flexible exchange rate regime.
The British pound retraced most of its losses vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.1885 level before recovering to test bids around the $1.8955 level. Sterling surged higher during North American dealing as dealers knocked the dollar lower ahead of this afternoon’s Fed interest rate announcement. Data released in the U.K. today saw weakness in the April manufacturing sector as CIPS manufacturing PMI receded to 49.5 from 52.0 in March – the first decline in some two years. This follows similar news released yesterday for the eurozone’s manufacturing sector. Another report issued by Nationwide today saw a pick-up in consumer confidence in April. Perhaps the most noteworthy news of the day was a report that showed U.K. retail sales declined last month at their most acute pace in nearly thirteen years. CBI reported that a net balance of 46% of retailers saw sales that were below average in April. On the political front, the U.K. general election will be held on Thursday and Prime Minister Blair’s Labour Party looks set to prevail. The real question is how much of a majority they will retain in Parliament, if one at all. Cable bids are seen around the $1.8870 level and cable offers are cited around the $1.8955/ $1.9045 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.6800 figure and remained supported around the ₤0.6775 level.
The Swiss franc gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1960 level after it failed to get through offers around the CHF 1.2015 level. Data released in Switzerland yesterday saw April PMI unchanged at 52.8 from a revised 52.8 in March. Data released today saw Swiss CPI rise 0.8% m/m last month and up 1.4% y/y, in-line with expectations. Dollar offers are seen around the CHF 1.2025 level and dollar bids are seen around the CHF 1.1920 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5440 level and was supported around the CHF 1.5395 level.
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