INTERACTIVE INVESTOR: “Economic woe causes uncertainty on currency markets”

Currencies Direct July 26th 2011 - 3 minute read

Ongoing uncertainty over the US
debt ceiling decision left the dollar on the sidelines while Greece’s downgrade hit the euro on
Monday, as risk-averse trading saw tight ranges on currency markets

The week began on a bearish footing for the euro/dollar pair
trading, with a drop to the 1.43 mark by midday expected to worsen in the
coming hours and into Tuesday.

Traders also seemed to be playing things safe with
euro/sterling trades while expectations of weak economic data in the UK have
undermined sterling’s chances of gaining.

All eyes will be on tomorrow’s GDP data with analysts are
predicting sluggish growth of 0.1% from the previous quarter and warn there is
the potential for a downside surprise.

Lacklustre growth or a contraction would increase the
likelihood of the Bank of England keeping interest rates unchanged until late
2012, and fuel calls for another round of quantitative easing.

The euro is not likely to retain the strength it gained last
week following Moody’s downgrade of Greece. This coincided with a
statement from the Institute
of International Finance
over the weekend which implied that they see the probability of a Greek default
at virtually 100%.

Tim Lewis at Currencies Direct said that this brings
Portugal, Ireland, Spain
and even Italy
right back into the firing line, and the euro along with it.

“While the dollar is sidelined during the ongoing
negotiations and the euro largely unloved, where does the short-term money go?
Ahead of expected weak UK
economic data this week and expressions of concern over the effects that a euro
collapse will have on the UK
outlook as a whole, sterling is being largely ignored.

“This leaves the yen, Swiss franc and the commodity
currencies as the investments of choice,” he warns.

Dollar set to come under pressure

Meanwhile, Antje Praefcke, analyst at Commerzbank,
highlights the fact that time is now also beginning to run out on the other
side of the Atlantic. She believes that even
if an agreement is reached short term now the US AAA-rating might still be
under threat. As a result, attention is likely to focus on the US dollar again
and put it under renewed pressure.

“The US
economic data due for publication during the course of the week might also put
pressure on the US dollar. Consumer confidence is likely to have deteriorated
slightly in July and the US
second-quarter GDP data should see only a small rise, as the fall of the ISM
index during the second quarter suggests. We also expect a weaker result for
June’s durable goods orders than consensus. All in all no good news for the
dollar, which in turn should benefit the euro,” Praefcke said.

Praefcke expects the euro/dollar price to remain above
1.4280 initially, with the debt ceiling discussion in the US containing the downside, whereas the question
of a “selective default” of Greece should limit the upside.

“In our view the only factor which might put again
exceptionally strong pressure on the euro again would be very negative news
from the eurozone or unexpectedly bad US
economic data causing markets to worry about the US economy running out of steam.
The resulting rise in risk aversion due to concerns about a global economic
slowdown and a resulting flight into safe assets would then paradoxically
support the dollar again,” she said.

Looking ahead, Mike McCudden, Interactive Investor’s head of
retail derivatives, expects the focus of currency traders this week to be
firmly on the US,
with the ominous deadline of 2 August looming on the horizon.

“Talks degenerated into political points scoring over
the weekend as both camps failed to reach agreement to raise the debt ceiling.
Resultant dollar weakness boosting the safe haven that is gold to break new
ground at $1,618/oz,” he said.

“If a comprehensive long-term agreement is not reached
within the next few days traders will be looking to the ratings agencies for
direction as a downgrade is on the cards. Other data from the US worth
keeping an eye on for direction this week is Consumer Price index on Wednesday.

“Overall, Interactive Markets trading volumes for
dollar FX bears has been not as strong as anticipated perhaps because the
traders gut is telling them a resolution will be on the table imminently.”

Written by
Currencies Direct

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