Thursday November 3, 2005 - 14:24:00 GMT
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Forex Market Commentary and Analysis (3 November 2005)
The euro tumbled lower vis-à-vis the U.S. dollar today as the single currency tested bids just below the $1.2000 figure after running out of steam around the $1.2080 level. As expected, European Central Bank’s Governing Council did not change interest rates today and dealers are awaiting comments from ECB President Trichet. ECB officials, including Trichet, have been increasingly hawkish in their statements as of late and have signaled that higher interest rates are forthcoming. The question on traders’ minds is when monetary policy will be tightened. Solid increases in EMU-12 M2 money supply aggregates and a build-up of inflation above the ECB’s 2.0% ceiling target have inflation hawks on edge. The big event in the market today will be the congressional testimony of outgoing Federal Reserve Chairman Greenspan. On Tuesday, the Federal Open Market Committee tightened policy by +25bps for the twelfth consecutive time. Dealers want to have a sense of how the Fed chief views the U.S. economy – and the prospect of additional rate hikes – before he departs the Fed at the end of January. The Fed’s policy statement signaled there is likely to be at least another +50bps of tightening in the currency cycle. Data released in the U.S. today saw preliminary Q3 productivity up +4.1%, above the most recent reading of +2.1%. At the same time, unit labour costs fell 0.5%, surely a relief to Fed policymakers who have been watching the uptick in wage inflation. Other data released in the U.S. today saw weekly initial jobless claims fall 8,000 to 323,000. Data released in the eurozone today saw EMU-12 October services PMI print at 54.9, up from September’s 54.7 level. French services activity improved while Germany’s services activity came off but was above the boom-or-bust 50.0 level. Dealers are also closely watching political developments in Germany where the Christian Democratic Party and Social Democratic Party have had difficult weeks that have inhibited the their planned coalition. Euro offers are cited around the $1.2075/ 1.2125 levels.
The yen traded in a very tight range vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥116.80 level and was capped around the ¥116.95 level, just below yesterday’s fresh multi-year high. Japanese financial markets were closed today and traders will turn their attention to September household spending data due tonight. Dealers will also closely watch Japanese equity prices as the Nikkei 225 stock index is around a 52-week high. Technically, chartists are eyeing the ¥118.45 level as the next significant upside target. Dollar bids are cited around the ¥116.60 and ¥114.50 levels. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥140.35 level after testing offers around the ¥141.15 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥207.15 and ¥91.00 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0841 level, down from CNY 8.0851. The World Bank released a forecast today that predicts the Chinese economy will expand 9.3% in 2005 and 8.7% in 2006. People’s Bank of China Vice Governor Wu Xiaoling was quoted as saying “he ultimate goal of our monetary policy is to maintain a stable value for the currency and thus promote economic growth.” She also added “Please do not always focus on the yuan level. The exchange mechanism is more important."
The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7715 level after encountering offers around the $1.7795 level. Data released in the U.K. today saw the October services PMI measure improve to 56.1 from 55.0 in September. Also, Q3 new construction orders were reported down 8% q/q and up 7.0% y/y. The increase in services activity is important because the services sector accounts for more than 60% of economic output in the U.K. Bank of England’s Monetary Policy Committee will release its next interest rate decision one week from today and is not expected to change interest rates. Cable offers are cited around the $1.7815/ 85 levels. The euro weakened vis-à-vis the British pound as the single currency tested bids around the £0.6760 level after testing offers around the £0.6800 level.
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2870 level and was supported around the CHF 1.2775 level. Swiss National Bank President Roth spoke yesterday and said it would be incorrect for the central bank to react to a “sharp but short-lived rise in the price index on the basis of changes to energy prices.” Most traders, however, believe the SNB will raise rates next month. Data released in Switzerland today saw the October consumer price index rise 0.9% m/m and 1.3% y/y, near the upper end of most forecasts. Dollar bids are cited around the CHF 1.2815 level. The euro moved marginally lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5415 level while the British pound appreciated vis-à-vis the Swiss franc and tested offers around the CHF 2.2805 level.
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