Friday December 2, 2005 - 10:53:59 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar probes resistance
The Euro was unable to push above the 1.18 level against the dollar on Thursday and Euro weakened back to 1.17 in New York following the ECB press conference and was holding close to 1.17 in early Europe on Friday ahead of the payroll report.
The potential for central bank Euro buying will be watched closely below the 1.17 level and will be a very important market factor, especially with evidence of reduced capital repatriation back to the US. Central bank buying would make it easier for the Euro to hold support.
The ECB interest rate decision was as expected with a 0.25% increase in the repo rate to 2.25%, the first increase for five years. ECB Chairman Trichet stated that the bank had not decided on a series of rate increases and would wait for forthcoming growth and inflation developments to determine policy. These comments, although not unexpected, will be interpreted as generally dovish in the short term and will tend to undermine the Euro initially, but there is the potential for some reassessment of the situation over the next few days.
The ISM inflation index dropped significantly in November and the annual core PCE inflation index within the personal spending data fell slightly to 1.8% from 2.0%. The net effect should be to soothe market inflation fears. The employment data on Friday will inevitably be very important, especially as the market reaction will be an important indicator of underlying dollar confidence. The earnings data within the report will also be watched closely after the big increase seen last month. Unless the earnings data is very strong, there will be greater speculation that US rates will peak at 4.5%. Reduced inflation fears would lessen near-term dollar buying interest.
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