Wednesday November 2, 2005 - 15:05:38 GMT
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Forex Market Commentary and Analysis (2 November 2005)
The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2045 level and remained supported around the $1.1990 level. As expected, the Federal Open Market Committee lifted the federal funds target rate by 25bps to 4.00% yesterday and indicated more rate hikes are coming. The Fed reported “core inflation has been relatively low in recent months and longer-term inflation expectations remain contained” and added “policy accommodation can be removed at a pace that is likely to be measured.” Most Fed-watchers seized upon the continuity in yesterday’s statement as an indication that policymakers plan to raise the fed funds target rate to at least 4.50%. One lingering question is whether outgoing Fed Chairman Greenspan will attend next month’s FOMC meeting or whether he will keep with Fed tradition and sit it out. The answer may depend on whether or not the Senate can approve the nomination of Ben Bernanke, whom President Bush tapped last week to succeed Greenspan. Chicago Fed President Moskow and New York Fed President Geithner are scheduled to speak later today. The Fed’s decision shifts the focus on the European Central Bank meeting tomorrow. ECB policymakers remain hawkish and the markets expect a 50% chance the ECB will tighten monetary policy in December from the current record low level of 2%. Traders will closely monitor what ECB President Trichet indicates in his post-meeting press conference tomorrow. Trichet’s recent mantra has involved “continued vigilance on inflation” and any ratcheting-up of this hawkishness could cause the euro to appreciate. Data released in the eurozone today saw Germany’s unemployment rate move lower to 11.6% in October from 11.7% in September, consistent with expectations. The German government today reported the number of jobless people in Germany may surpass five million this winter. Fed Chairman Greenspan testifies before Congress tomorrow about the economy and October U.S. non-farm payrolls data will be released on Friday. Euro offers are cited around the $1.2075 level.
The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥116.95 level and remained supported around the ¥116.60 level. Options traders report options-related offers just below the ¥117.00 figure and these prevented the pair from eclipsing this barrier earlier in the day. Nikkei released a series of forecasts predicting the Japanese economy expanded 0.3% q/q in the July-September period, equivalent to an annualized rate of 1.1%. If confirmed on 11 November, it would mark the fourth successive quarterly improvement in domestic demand, a necessity in ending Japan’s long-term battle with deflation. Notably, the economy expanded an annualized 3.3% pace in the April – June period. Data released in Japan today saw the October monetary base grow at a 2.8% y/y rate, the fastest rise since June. The Nikkei 225 stock index climbed 0.19% to close at ¥13,894.78. Dollar bids are cited around the ¥116.00/ 115.45 levels. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥140.65 level and was supported around the ¥140.15 level. Today’s high represents the pair’s strongest print since 14 March 2005. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥206.80 and ¥91.10 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0851 level, down from CNY 8.0860. The Chinese media reported growth in China’s energy and raw materials sectors will decelerate in 2006. A People’s Bank of China official today said the central bank is not ready to change monetary policy because it continues to monitor the growth in domestic loans.
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7715 level and remained supported around the $1.7625 level. The pair erased most of yesterday’s losses despite a decline in the CIPS October construction activity index to 53.9, its lowest reading in five months. The index printed at 57.2 in September and the October decline was attributed to less new orders. Some traders still expect Bank of England’s Monetary Policy Committee will ease monetary policy further. Recent economic data have been improving, however, and the likelihood of additional easing next week is remote. On the political front, the European Union will convene on Monday to discuss future budgets. The U.K., which currently holds the rotating six-month EU presidency, wants the EU to agree on a budget deal in December. Cable offers are cited around the $1.7740/ 1.7815 levels. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6785 level and was capped around the £0.6815 level.
The Swiss franc strengthened vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2800 figure and was capped around the CHF 1.2885 level. Swiss National Bank President Roth spoke today and said”It would be wrong to react (by hiking rares) to a sharp but short-lived rise in the (price) index on the basis of changes to energy prices.” He did, however, reconfirm the Swiss economy is recovering and suggested current interest rates are not “appropriate.” Most traders expect the SNB will tighten policy next month at its year-end news conference. October CPI data will be released in Switzerland tomorrow. Dollar bids are cited around the CHF 1.2750 level. The euro and British pound moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5415 and CHF 2.2675 levels, respectively.
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