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Early US Session-Dollar Surges Higher Across the G10
Market Brief
The Usd rose substantially in the early trading session based on a dovish outlook regarding monetary policy in Europe. The EurUsd fell over 200 pips to the mid 1.50 level, while the UsdJpy gained nearly 70 pips, trading with a 110 handle. The GbpUsd dropped 250 pips to 1.91, as fundamentals are beginning to be realized in the current price. Equity markets recovered most of yesterday’s losses in the US, up nearly 200 puts in the Dow, while European stocks made a marginal move to the upside. The commodity sector continues its reversal, with oil down to 116, and gold trading lower at 854. Bond yields began to widen again, as traders are positioning themselves in favor of risks ahead of next week’s trading session.
The ECB held rates steady at 4.25, which was in line with market expectations. It was the commentary released from Trichet regarding growth concerns and issues stemming from both the credit crisis and global inflation which had a significant effect on the currency markets. The Euro traded through previous support to 1.50, which is in-line with our range projection of 1.48-1.51 in the near-term. The BOE whom also decided to hold rates steady at 5.00%, are in a growth sensitive state which may require them to ease rates towards the end of the year. Monetary policy should shift to a softening phase throughout most of the G10, supporting the FIFO (First in First Out) theory, which states that the US should emerge from the recent financial downturn, while some of the other major economies are just entering the negative portion of the cycle. We project the cable to see additional weakness due to deteriorating economic conditions, the price range should move between 1.89-1.92.
The US Financial Markets posed a major rally on weaker oil prices and a shift in market sentiment favoring risk. The dollar displayed resilience despite a volatile week on the equity side and more bad news from the credit markets in the form tight liquidity while banks digest losses. The FX sector has started a divergence from events in other pockets of the markets, showing a much needed level of isolation in order for the Usd to sustain its recent upward momentum.
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