Dollar Coming Under Pressure As Risk Appetite Continues With US GDP Figures Expected

DailyFx · August 3, 2009, 6:30am

The Euro has gave back earlier gains after reaching an intra-day high of 1.4157 at the beginning of European trading as equity markets have turned negative. A decline in the Euro-Zone July CPI- estimate to a 13 year low of -0.6% from -0.1% has added to bearish sentiment as continuing disinflation will force the ECB to keep rates at a record low 1.00%.

[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Found Resistance at 95.70
• Pound: Consumer Confidence Unchanged
• Euro: Inflation Expectations Fall To 13 Year Low
• US Dollar: U.S. GDP On Tap
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[U]Dollar Coming Under Pressure As Risk Appetite Continues With US GDP Figures Expected To Signal Recession Ending [/U]

The Euro has gave back earlier gains after reaching an intra-day high of 1.4157 at the beginning of European trading as equity markets have turned negative. A decline in the Euro-Zone July CPI- estimate to a 13 year low of -0.6% from -0.1% has added to bearish sentiment as continuing disinflation will force the ECB to keep rates at a record low 1.00%. We also saw Italian CPI fall to its lowest level since 1959 as food and utilities prices fell. Meanwhile, EZ unemployment figures for June showed a rise from a revised 9.3% to 9.4%, but the reading was lower than the initial May print of 9.4% and forecasts of 9.7%.

The EZ inflation data adds to the 0.6% decline in German consumer prices signaling that prices continue to remain depressed for the region which will put pressure on corporate profits going forward and could force the ECB to consider further easing. Although, it is widely expected that the central bank won’t go below the current 1.00%, the IMF’s recent call for the ECB to continue its accommodative stance as long as downside risks remain for prices started to lower interest rate expectations which could weigh on the Euro. However, the single currency’s correlation to risk remains and the improving outlook for the global economy has fueled demand for high yielding assets which could continue today. Indeed, an improvement in the Swiss KOF reading has started to help the Euro regain its footing as it reached its highest level since January.

The pound has reached an eight day high of 1.6573 as risk appetite continued in Asian trading and consumer confidence held at -25. The reading missed expectations for an improvement to -23, but considering that we have been seeing sentiment fall in other regions the stable print was viewed as a positive. A test of the 6/3 high of 1.6665 remains a possibility, especially of we see bullish sentiment continue in the U.S. However, we may see traders remain cautious with a slew of data due next week including a BoE decision. The 50-DAY SMA at 1.6339 remains as staunch support and a break below there could significantly increase downside risks.

The dollar has started to firm after earlier weakness as markets await 2Q GDP figures which are expected to show that the recession in the U.S. is abating. Forecasts are calling for a contraction of 1.5% following a 5.5% drop for the prior three months, which would be the fourth straight quarterly decline in growth making the recession the worst since WWII. Expectations are growing that the economy could see a return to expansion in the third quarter and an inline or better print would fuel optimism and prevailing risk appetite. Therefore, we could see continued pressure on the dollar unless we see its correlation to risk break as investors become bullish on the U.S. economy. We could also see the greenback rise on a bigger than expected contraction or a significant decline in personal consumption which is forecasted to fall by 0.5%. If consumers are continuing to retrench as they battle rising job losses, the outlook for domestic growth could dim sinking equity markets and sparking dollar support.

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