Friday February 3, 2006 - 16:55:26 GMT
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FX Briefing 3 February 2006
FX Briefing 3 February 2006
â€˘ US growth weak in Q4, but forecast for Q1 is favourable
â€˘ ECB still on course to raise interest rates
â€˘ Minor currencies under the impact of the dollar
EUR-USD range trading could come to an end
EUR-USD shows no sign of moving out of the trading range of 1.20 and 1.22, in which it has been since the beginning of the year. Its attempt to break out last week was soon thwarted. And
this week, the dollar even managed to gain ground again. At 1.2050 at the end of the week, EUR-USD was back in the lower half of the trading range again. USD-JPY has followed a similar pattern with a trading range of 114 to 118 since the beginning of the year. However, due to the dollarâ€™s strength this week, the yen seems to be moving out of this range. At 118.50, the Japanese currency hit its lowest level this year. But it was even weaker against the other Asian currencies. Thus the Korean wonâ€™s strong appreciation trend against the yen, which had started last week, continued further.
At first glance, the dollarâ€™s strength against the euro and the yen seems somewhat surprising, as at the end of last week, the weakest rise in US GDP since the end of 2002 was reported for the fourth quarter. The economy grew by a mere 1.1 per cent â€“ significantly lower than the marketâ€™s growth expectations, which were already quite modest. In addition, the Fed raised its funds rate for the fourteenth consecutive time to 4.5%, but at the same time softened its rhetoric. In its statement, the FOMC only said that further tightening â€śmay be neededâ€ť.
However, the message that the Fed is still leaving the door open for further tightening was more important for the markets. Against this background, an analysis of the US GDP figures is crucial. The main reason for the weak US growth is the disappointing development of private consumption last August and September. As the chart shows, this had a substantial negative impact at the start of the fourth quarter. However, during the course of the fourth quarter, private consumption picked up again significantly and investment activity seems to have livened up too.
Thus the start of the first quarter of 2006 looks very favourable. Even cautious estimates are expecting GDP growth for the current quarter to be around 4 per cent again. Also the soft indicators indicate a substantial improvement on the labour market. If this is confirmed in the labor market report, it is hardly likely that the Fed, under the leadership of its new chairman Ben Bernanke, will pause in its tightening policy in March. Thus hopes that the end of the tightening cycle in the US is imminent, seem to be dwindling again. This had been the main reason for the dollarâ€™s weakness since the middle of November.
On the other hand, the ECB acted as the markets had anticipated after the speeches of various ECB representatives: Jean-Claude Trichet continued to prepare the markets for an interest rate hike in March. Thus there was not a strong reaction by the forex market to yesterdayâ€™s press conference.
Next week will probably be dominated by the aftermath of US labour market data, which will be published this Friday afternoon. If the marketâ€™s very positive expectations are fulfilled, this could fuel expectations of further tightening. EUR-USD could then break out below the current trading range of 1.20 to 1.22.
A firmer dollar will probably put pressure on minor currencies like the Aussie dollar, because the interest rate differential to the dollar area is diminishing increasingly. Here investors seem to be tending towards the New Zealand dollar with its significantly higher interest rates. In January, the Australian currency had already hardly been able to gain ground despite the rising gold price. On Tuesday, the Reserve Bank of Australia will make its first interest rate decision of the year. The monetary policy committee will most probably leave the interest rate at 5.5%, where it has been for about a year.
Uwe Angenendt +49 69 718-3648
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ¤fken
+49 69 718-2688
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