Reaching highs of $1.428 versus the USD after last Wednesday’s announcement from the Fed that it was extending its quantitative easing activities, the euro has moved broadly lower as the week kicks off, with concerns about the public finances in some peripheral eurozone countries finally impacting on the currency. Speculators trimmed positions as the focus switched to uncertainties that could be caused by tough budgetary talks and local elections in Ireland and Greece, with the USD/EUR rate falling back below the $1.40 level. The dollar is also finding some support in Friday’s release of a better than expected US non-farm payrolls report for October. The data showed that 151,000 jobs were added over last month, well ahead of expectations of a 60,000 gain. The number marked the fastest pace of hiring since last April, with previous months data also revised higher. The unemployment rate, however, remained unchanged at 9.6%.

The Fed statement this week made the US dollar data dependent by explicitly making their quant easing (QE) program dependent on the labour market conditions. The introduction of QE told investors that when the economy drowns and equities drop the Fed will speed up the printing press. By this then limits the safe haven appeal of the US dollar, which used to get stronger when equities fell. On Thursday the ECB made clear that it will not participate in a tit for tat game and weaken the euro in response to US QE. Japan, as we learned on the same day, has a stronger bias to do this. The labour market report, the final highlight of the week, challenged the Fed’s QE with quite a strong reading. However, a series of improvements are needed, before the Fed can change its mind. We therefore expect the EURUSD exchange rate to remain close to 1.40 for the remaining two months of the year.

In a rare reference to the dollar last week, Bernanke said that “we’re certainly aware that the dollar does play a special role in the global economy”, and that “the best fundamentals for the dollar” will occur when the US economy is growing strongly. Treasury Secretary Geithner reaffirmed that a strong dollar is in the interests of the US, and that the US will never use its currency to gain competitive advantage. He said the flow of capital into emerging markets is fundamentally positive as it shows confidence in their growth prospects.

The sterling/euro rate, meanwhile has started the week trading around Stg0.865, with sterling holding on to some of its gains seen versus the USD last week despite the fact that dollar sentiment has improved somewhat. Sterling may struggle to remain firmer versus the USD if Wednesday’s quarterly inflation report proves to be a dovish one. The report will contain updated growth and inflation forecasts and should shed some light on the prospects for further quantitative easing. The near term outlook for inflation is likely to be revised upwards, reflecting recent higher than anticipated CPI numbers. The longer term view, however, that inflation will move back below target should be unchanged. The euro, meanwhile, will be looking to Friday’s release of the first estimate of Q3 GDP for support. Solid growth of 0.4% is anticipated, though this is well below the previous quarter’s robust growth rate of 1.0%.

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Tom Trevorrow
Senior Trader

Tel: +0044 1736 335264
Email: tom.trevorrow@torfx.com