EUR/USD fails to hold 1.50

Currencies Direct October 27th 2009 - 2 minute read

The big news in the markets yesterday was the rally of the USD in particular against the euro but in addition against the Yen and higher yielding currencies. Is this the start of a sustained rally after prolonged USD weakness? Probably not yet but it is a relief rally and again highlights the fragility and volatility in the global markets. At US open yesterday equities rallied and the USD weakened further-it looked business as usual. However the markets suddenly turned and equities and commodities dropped sharply and strength came back into the USD led by the drop in stocks. It is a little uncertain what caused the sell off- there were reports of heavy selling of EUR/USD by a Swiss private bank and the fact that EUR/USD looked tired at the 1.50 level probably led to jitters that a top had been reached.

GBP/USD came out unscathed and was largely supported to 1.64 by the dividend related buying by the UK oil company which was completed in the early afternoon. We did then see a dip back to 1.63, however in overnight trading we experienced another rally towards 1.64 with rumours noting that a US bank acting on behalf of an Asian sovereign supporting the overnight gains. The pound may have also been supported by feedback from Goldman Sachs stating that the pound is the most undervalued since 1999 based on the purchasing power parity theory. The pound also gained against the euro pushing back towards 1.10 helped in part through euro weakness against the USD. Expect further ups and downs with sterling as dovish comments from Bank of England members are stacking towards further QE expansion in November which would undermine the pound again.

Not a great deal of data for the market to get its teeth into; we have UK CBI Distributive trades which is expected to improve from September. For the USD we have Consumer confidence which may be a weak number given the recent drop in the IBD confidence report. A weak number should help the USD to gain further after yesterdays rally.

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