04.10.2010 The US dollar is on the firing line!

Once again we indicate that the risks in EUR/USD on Forex are shifted upwards due to the expectations that the Fed will announce a new round of quantitative easing in the context of meeting on November 2-3. The most recent factors that can nourish the risks of this kind and make us speak about a possible rise in the EUR/USD to the level of 1.40 in October are as follows:

• A report of Ben Bernanke on September 9 and the comments that the Fed must help the economy. In our view, the statements of this kind are a certain confession that the situation in the US economy worsened enough to resume QE.
• A speech of the president of the Federal Reserve Bank of New York William Dudley emphasizing a necessity of further economy stimulus until we see significant improvement in the labor market and inflation level.

 
Given the fact that both Dudley and Bernanke are the key figures in the Fed, such announcements best explain the recent rise in EUR/USD.
 
As for the recent publication of decent macroeconomic data in the US (30/09 Jobless claims and Chicago PMI better than was estimated, 01/10 ISM Manufacturing, Michigan Sentiment Index, Pesronal Income, Construction spending above expectations), we still believe that in the context of the Fed’s meeting on November 2-3 of primary importance are the announcements of the Fed’s majors.
 
In support of this point of view we have a dynamics of US Treasury market, where the prices for the 2-year Treasury notes have been showing a rise for a 3rd week now, despite the positive dynamics of US fund indexes throughout September and the decline in probability recession resumption in the US.
 

December futures for the price of the 2-Year US Treasury Notes (CME)
 
Employment report, ECB
Speaking of the current week’s prospects we would like to point out the publication of Nonfarm payrolls on Friday, November 8, which, presumably, will indicate a rise of unemployment level in the region to 9.7% from 9.6% a month earlier. Namely, the Fed’s intention to go for easing of the monetary policy may well be explained by the weakness of the labor market and the fears that the unemployment level will reach the crisis levels of 10%.

Moreover, we point out the meeting of ECB which is scheduled to take place on October 7, assuming that it can also provide support to EUR/USD. Last week both J.C.Trichet and Jurgen Stark made it clear that they are looking towards normalization of the Eurozone’s monetary policy. Again, we are observing a stabilization of the Irish bond market as well as positive shifts in the prices of Greek bonds. Consequently, this can be a possible driver for a subsequent rise in euro.
 
Currently we are emphasizing the following significant resistance levels in EUR/USD - 1.3780, 1.40 and 1.4150.
 
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
 
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