We can’t really say that the situation on the Forex market has changed in any significant way over the past week. All in all, it seems that the market is still in...
We can’t really say that the situation on the Forex market has changed in any significant way over the past week. All in all, it seems that the market is still in the “holiday” mode, which finds its reflection in volatility decline and a sideway trend on EUR/USD. In the given situation, probably the best decision would be to wait until euro leaves the 1.3080-1.3150 boundaries over the upcoming trading days.
As for the general ideas, basically there is a number of factors indicating further appreciation of the US dollar. The most important thing, however, is to see the technical picture (see above) confirm the fundamental component.
US 10-year Treasury March Futures (CBOT)
We continue perceiving the dynamics of the US bond market as a US dollar favoring factor. On the one hand, we see Treasury notes’ prices extending a decline which indicates the changes in expectations over the US monetary policy. On the other hand, PBoC’s decision to raise key interest rates over the past weekend as well as a decline in the risk appetite amid increased Treasury yields may spur demand for dollar assets, thus providing support for the US currency.
Eurozone yield curve (3 Month Libor, Eurex)
Moreover, we see a further tightening of the interest rate differential between Europe and the US which is rather clearly seen in the German-US 2-year government bond yield spread. This factor may also confirm a mid-term downtrend in EUR/USD and our 1.26 target for 1Q11.
US-German government bond yield spread (2-year)
UK yield curve (3M Sterling, Liffe)
Speaking of the GBP/USD pair, it’s worth emphasizing a release of weak UK housing price data. According to Hometrack, housing prices decreased for the 6th subsequent month in December (actual -0.4% m/m and 1.6% y/y). Data published by British Retailer Consortium (BRC) could also be putting downside pressure on the British pound. According to BRC, given somewhat depressed household sentiments consumer activity may decrease in 2011.
We, however, still believe that all the pound-negative data has already been outplayed on Forex; therefore, the data published today will not be able to push the GBP/USD pair down. Moreover, it is possible that the previous week’s news background and the speculations regarding the high level of inflation in the UK will be a good reason for an upside correction in GBP/USD, as it signals a necessity of tighter monetary policy.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
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