Dollar stays weak on expectation Fed cut rates in December

The Dollar fell on Wednesday on speculation that the Federal Reserve may cut interest rates again this year to prevent a weak housing sector from damaging the broader economy. Comments by former Fed Chairman Alan Greenspan on Wednesday and by San Francisco Fed President Yellen late on Tuesday highlighted concerns about the economy, adding to fears that signs of slower growth would lead to lower rates. Although minutes from the Fed’s September meeting released on Tuesday revealed little inclination by the central bank to cut again this month, December rate futures shows 76% chance of a 25 basis point rate cut that month.
Greenspan said the credit squeeze that has rattled financial markets will take its toll eventually on the US economy, adding to falling home prices and forcing consumers to cut back spending. <!-- #EndLibraryItem -->

News and Events:
<!-- #BeginLibraryItem “/Library/2-YNE.lbi” -->The Dollar fell on Wednesday on speculation that the Federal Reserve may cut interest rates again this year to prevent a weak housing sector from damaging the broader economy. Comments by former Fed Chairman Alan Greenspan on Wednesday and by San Francisco Fed President Yellen late on Tuesday highlighted concerns about the economy, adding to fears that signs of slower growth would lead to lower rates. The Dollar has been undermined by the prospect of further rate cuts, and the currency has been unable to capitalize on last week’s solid jobs report and rising bond yields, remaining near an all-time low against the Euro.
Although minutes from the Fed’s September meeting released on Tuesday revealed little inclination by the central bank to cut again this month, December rate futures shows 76% chance of a 25 basis point rate cut that month. Possibility for another quarter point cut in October stand at only 34% percent, compared with 64% before Friday’s stronger-than-expected September payrolls report.
At yesterday close, EurUsd traded at 1.4139 up 0.23% on the day. It hit a record high of 1.4280 last week. Sterling ended unchanged at 2.0391, after having hit an intraday 2.0477 high. Bank of England Governor Mervyn King said he would monitor inflation closely, raising the bar for a UK rate cut.
Greenspan said the credit squeeze that has rattled financial markets will take its toll eventually on the US economy, adding to falling home prices and forcing consumers to cut back spending. Signs of continued growth outside the United States helped support some investor risk appetite.
The Bank of Japan is expected to end a two-day policy meeting on Thursday by keeping interest rates at 0.5%. That also weighed on the Yen, often borrowed cheaply to finance purchases of higher-yield assets.
The UsdJpy was unchanged at 117.23, while the EurJpy rose 0.15% to 165.60. Earlier, the EurJpy climbed to a two-and-a-half-month high 166.25. EurChf jump 0.3% to 1.6747, a 10-year high. <!-- #EndLibraryItem -->

<!-- #BeginLibraryItem “/Library/Forex_Chart.lbi” --><!-- #EndLibraryItem -->

Today’s Key Issues (time in GMT):

<!-- #BeginLibraryItem “/Library/3-TKI.lbi” -->[B]09:00 EUR[/B] 2Q Euro-zone GDP 0.3% vs 0.7% (QoQ)
[B]09:00 EUR[/B] 2Q Euro-zone GDP 3.2% vs 2.5% (YoY)

[B]12:30 CAD[/B] August Trade Balance CAD$ 3.7B vs 3.66B
[B]12:30 CAD[/B] Oct New Housing Price Index 14 vs 18.1

[B]12:30 US[/B] August Trade Balance $-59B vs $-59.25B
[B]12:30 US[/B] Sept Import Price Index 0.9% vs -0.3%
[B]12:30 US[/B] Sept Export Price Index 0.3% vs 0.2%
[B]12:30 US[/B] Initial Jobless claims 315k vs 317k <!-- #EndLibraryItem -->

The Risk Today:

<!-- #BeginLibraryItem “/Library/4-TRT.lbi” -->[B]EurUsd[/B] hit last week all time high 1.4280, which marks initial resistance before a new extension to 1.4291 and 1.4333 strong resistance. But market reversed on Wednesday and broke down 1.4165 support, opening the way down to 1.4000 nearby support and 1.3927 where a lower development would threaten the up-trend. On a long term view, it would need a return below 1.3719 to confirm trend change. Initial resistance hold 1.4165 former support.

[B]GbpUsd[/B] hit yesterday 2.0477 high close to last week 2.0494 two-month high. Cable is now narrowing between 2.0494 and 2.0278 last Thursday low. Dropping below 2.0363 may open the way to further downside toward 2.0200. But it would need a drop below 2.0000 psychological level and 1.9880 support to confirm trend change. Beyond that point, 1.9821 marks strong support (76.4% retracement of 1.9652 to 2.0366 advance). Initial resistance holds 2.0477.

[B]UsdJpy[/B] downtrend seems ended further to 116.21 break up. It need a confirmation over 117.13 to relieve the negative tone and open the way for further extend toward 119.06 (61.8% retracement of 123.67 to 111.60 decline). On the downside, a return below 113.39 (Sept. 11 low) would open the way toward 112.61 and a possible retest of 111.60 (August 17 low). Initial resistance holds 117.63 Monday high.

[B]UsdChf[/B] rebounded from 1.1622 early October low and went up to 1.1895 high on Tuesday. Initial resistance holds 1.1923 (38.2% retracement of 1.2477 to 1.1577 decline). On the actual uptrend, a recovery beyond 1.1962 is also needed to relieve the actual bear threat. However, renewed weakness may reopen the way toward 1.1680 key support. A break there will extend the downtrend toward 1.1500 psychological support and possibly 1.1484 (2005 March 14 low). <!-- #EndLibraryItem -->

<!--

–>
Resistance and Support:

<!-- #BeginLibraryItem “/Library/FFY/FFY-Table-IMG.lbi” --><!-- #EndLibraryItem -->

By<!-- #BeginLibraryItem “/Library/0-Author.lbi” --> [B]Jean-Claude Braha [/B]<!-- #EndLibraryItem -->- ACM Advanced Currency Markets, Geneva, Switzerland