Wednesday October 5, 2005 - 13:57:55 GMT
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Forex Market Commentary and Analysis (5 October 2005)
The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1965 level and was supported around the $1.1915 level. Continued hawkish comments from Federal Reserve officials have capped the common currency’s upside in recent sessions. Dallas Fed President yesterday said “Inflation has been on an upward tilt the past couple of years. Now, the inflation rate is near the upper end of the Fed's tolerance zone, and shows little inclination to go in the other direction.” Fisher also indicated some businesses are trying to pass along higher energy costs to consumers as a result of hurricanes Katrina and Rita. Turning to fiscal policy, he said “If the Federal Reserve were to resist the upward pressure on interest rates, it would in effect monetize the burgeoning fiscal deficits.” Philadelphia Fed President Santomero echoed Fisher’s comments saying “To keep cyclical price pressures and any transitory spike in energy prices from permanently disrupting the price environment, the Fed will have to continue shifting monetary policy from its current somewhat accommodative stance to a more neutral one.” Along the same lines, St. Louis Fed President Poole said “I have no doubt that both the FOMC and the market would respond to surprises in core inflation that seemed likely to be persistent and to indicate a developing inflation problem. Poole added that the Fed aims to keep core inflation in a 1-2 pct range. "If the inflation environment becomes unhinged, that is going to lead to all sorts of unfortunate things in the real economy; it is going to make things less stable.” Fed officials have been quite hawkish in the aftermath of hurricanes Katrina and Rita, rendering it quite possible the federal funds target rate will be around 4.25% by the end of the year and possibly at 4.50% by the time Fed Chairman Greenspan leaves his post at the end of January. Data to be released in the U.S. today include the September ISM non-manufacturing survey. Dealers will pay particularly close attention to the prices sub-index. Other data scheduled for release today include August pending home sales and Challenger layoffs. The inflation picture is also becoming more defined in the eurozone as well. Data released there today saw the EMU-12 September services PMI survey improve to 54.7 from 53.4, surpassing expectations. Germany and Italy notched improvements in their service PMI surveys while France’s performance dropped back. These latest reports follow recent data that indicate an increase in price pressures in the eurozone. The European Central Bank convenes tomorrow and is unlikely to change monetary policy. Remarks from ECB President Duisenberg will be closely scrutinized, however, for any clues about the timing of an eventual monetary tightening. Other data released today saw EMU-12 August retail sales climb 0.9% m/m and 2.0% y/y. On the political front, Germany’s Christian Democratic Union and Social Democratic Party will convene again today to discuss forming a “grand coalition” to break the recent electoral deadlock. Euro offers are cited around the $1.2010 level.
The yen retraced some of its recent losses vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥113.55 level and was capped around the ¥114.40 level. Technically, the pair reached a new multi-month high for the third consecutive session before moving below the ¥114.00 figure. Traders continue to evaluate the war of words between Bank of Japan policymakers and government officials. Central bank officials – including Governor Fukui – have made clear their intentions to begin to unwind Japan’s long-standing quantitative easing policy sooner rather than later as deflation is coming to an end. MoF and government officials, however, are quick to remind the BoJ that deflation remains a “mild problem.” The most likely timetable for an end to the unorthodox monetary policy is around the end of the fiscal year (March 2006) and probably no later than the end of H1 2006. August household spending data will be released in Japan on Friday and traders continue to look for evidence that final private demand is improving. The August coincident index and leading economic index will also be released. The Nikkei 225 stock index lost 0.36% to close at ¥13,689.89. Dollar bids are cited around the ¥113.30 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥135.85 level after encountering offers around the ¥136.35 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥200.30 and ¥87.55 levels, respectively. In Chinese news, the September Chinese manufacturing PMI survey improved to 50.9 from 50.6 in August while the headline PMI survey moved higher to 55.1 from 52.6, the second consecutive monthly improvement.
The British pound was flat vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7575 level and tested offers around the $1.7660 level. Data released in the U.K. today saw the September services PMI survey recede to 55.0, its lowest level since December 2004 and below expectations. The new business sub-index tumbled to its lowest level since September 2004, another bearish indication for the dominant U.K. services sector. Other data released today saw the September BRC shop price index inflation rate gain 0.98% m/m and 0.54% y/y. August manufacturing production and industrial production data will be released tomorrow. Cable offers are cited around the $1.7725 level. The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the £.0.6790 level and was supported around the £0.6770 level.
The Swiss franc gained moderate ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2955 level after failing to get through offers around the $1.3020 level. Swiss September unemployment data will be released on Friday. Dollar bids are cited around the CHF 1.2945/ 1.2925/ 1.2895 levels. The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5495 and CHF 2.2835 levels, respectively.
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