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Idea of the Day

There have been some interesting dynamics on the euro at the present moment in time. On the one hand, there are increased signs that the ECB may offer another longer-term refinancing operation. All else equal, this would be euro negative. But the euro was one of the stronger performers (along with sterling) yesterday as the dollar gains after the initial post-Fed slump came to an end. The supportive factor is that the Eurozone is running a current account surplus and as investors become more nervous about emerging markets (especially those required to attract overseas capital), the euro is seen by some as a more attractive alternative to the dollar. As we talked about yesterday, there are opposing dynamics on the greenback as the debt ceiling debate continues, safe haven versus fiscal concerns. This means that even if the ECB do warm further to further policy measures, the impact on the euro may be limited.

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Data/Event Risks

GBP:  The final GDP data brings less risk of revision than the earlier releases, but is of modest interest for the finer details offered on the household sector and saving, but any upward revision to the 0.7% figure seen (a couple of banks are looking for this) would be sterling positive.

JPY:  Focus early Friday will be on the CPI data, where the market is looking for a further small increase in the headline rate from 0.7% to 0.8%. Recall that the BoJ has a 2% target for inflation, so any number greater than this would be yen negative, on the basis that quantitative easing will continue and there is a greater possibility of Japan exiting from the deflationary trap that has gripped the economy for most of the past 20 years.

Latest FX News

EUR:  The euro was leading the fight-back (along with sterling) against the upward creep of the dollar seen since the Fed decision in the middle of last week.

JPY:  The yen weaker during Asia, partially on renewed speculation of a cut in corporate taxes, which gave shares another boost and pushed USDJPY above the 99.00 level.

AUD:  Some underlying support for the Aussie overnight as stocks firm and helped by the general fight-back against dollar weakness seen during Wednesday. Aussie downtrend from the 0.9529 high seen last week remains in place.

Further reading:

EUR/USD September 26 – Sits on high ground ahead of key US releases

US New Home Sales rise as expected in August