The dollar fell across the board in early morning trade after a brief spike against the yen on talk of intervention from the Bank of Japan. However, the move was later dismissed as a miss-hit or technical glitch with the dollar quickly falling back. The euro is testing resistance at $1.40, as the market gears up for the Federal Reserve policy meeting which takes place tomorrow and Wednesday. The general expectations is that the Fed will announce further quantitative easing measures (QE) but dollar direction will very much depend on the size and scope of any new initiatives undertaken. The dollar faces another key test this week, with the October non-farm payrolls due for release on Friday. A modest increase is anticipated, though this is unlikely to be sufficiently large to have any impact on the unemployment rate. This week also sees the resale of the manufacturing and services ISM’s.

The British Pound made another run above 1.6000 and the UK currency may continue to trade higher – possibly testing the next level of resistance over the week as market participants scale back speculation for another round of quantitive easing. The Bank of England is widely expected to maintain its current policy next week as the economic releases suggest a run of positive data and overall gathering of pace for the UK ecomnomy. The Central bank may drop its dovish tone as inflation continues to hold above the government’s 3% limit for price growth.

Neither the European central bank or the Bank of England are expected to make any policy changes. In the case of the Bank of England it has been anticipated that it could also announce some further QE measures. However, last week’s better than expected Q3 GDP report has changed that view, with markets now anticipating that any additional policy stimulus will not happen until 2011, depending on the state of the economic recovery. This week also sees the release of the eurozone and UK manufacturing and services PMI’s for October, which will be important in terms of gauging the pace of economic recovery in both areas. Sterling is holding onto much of the gains seen versus the euro late last week, trading around the Stg0.87p level, while the dollar/ sterling rate has started the week above $1.60. Disappointing Hometrack house price data released overnight, however, could limit sterling’s upside.

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Tom Trevorrow

Senior Trader

Tel: +0044 1736 335264

Email: tom.trevorrow@torfx.com