Investors flock to US dollar

While the Obama administration campaigned members of Congress to support a military strike against Syria, investors flocked towards the USD, with the dollar index moving higher last week.

US economic data on Friday disappointed with personal spending and income decreasing in July. This comes after a revised higher GDP for Q2 and better-than-expected jobless claims. It is evident the US is going through a patchy recovery and the recent developments are pushing the question of tapering in September to December for some.

The momentum of market expectation has come to a point that the Fed will have to address this. They have said asset purchases can be increased or decreased. This is a busy week with key data expected from the US and the eurozone, and central bank announcements.

USD/JPY

The yen gained against all its peers last week while the euro fell to a one-month low against the dollar. Signs that the Japanese economy is recovering were seen in the data last week.

Markit/JMMA Manufacturing PMI increased to 52.2 from 50.7, easing concerns of a slowdown and the jobless rate has steadily decreased to 3.8%, slightly better than estimated, by 0.1%. Industrial output increased less than was forecast at 3.2% versus the 3.6% expected. It was a jump from last month’s fall of 3.1%. Although Japan is some distance from generating 2% inflation, the economy appears to be heading in the right direction.

CPI excluding fresh food rose 0.7% year on year, beating estimates of 0.6%, but the underlying push for this is due to higher energy costs. The question of the implementation of the sales tax is still pending, although PM Abe has made headway in securing support from the consultative panel.

Economic Minister Akira Amari has reassured investors that “the economy is moving in a positive direction in terms of being able to implement the sales tax increase”. Some of these uncertainties will weigh on the USD/JPY.

EUR/USD

Investors have ignored the stronger economic data in the eurozone and sold the euro on the back of a surprise weakness in retail sales. There was a decline of 1.4% in July from being 1.5% down in June, while estimates had been 0.6%. The euro has struggled to break past 1.34 against the US dollar, instead declining from that resistance level. Although Germany has been the bright spot, the rest of the region continues to struggle with high unemployment and weak growth.

The ECB’s Governing Council member Ewald Nowotny said that “interest rates remain at current levels or lower”. This has caused investors to view that a rate cut is possible at this week’s policy meeting on 5 September. With this sentiment, we expect weakness in the euro to persist, technically a retracement to 1.3280-1.3300 levels before heading further south.

EUR/JPY and GBP/USD

EUR/JPY has been unable to break past 132 after its third attempt on 23 August. We expect the likely bearish breakout if it trades lower than the key support levels of 129.30.

Traders have been cautious with the sterling despite stronger housing data. Mortgage approvals rose to 60.6k in July, their highest in five years, while the GfK consumer confidence index rose 13, to its highest level since June 2009. The British Chambers of Commerce raised its GDP forecast for the UK to 1.3% this year, from 0.9% previously.

Given these recent data, it would be difficult to expect the Bank of England to cut rates unless the PMI and other data this week show significant weakness. Thus, GBP/USD is at a key area with two possible scenarios.

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