FX Update And USD Outlook

The Dollar Index would, on appearance, suggest that the dollar has done absolutely nothing today, up just 0.02% over the Asian and European sessions, however this was more a result of the dollar gaining against the euro, offset by losing ground to the yen.

EUR/USD: The main news out today was that of the Italian President Napolitano being reelected for his position. Weeks ago rumours had been that the President would step down early in order for his mandate to expire so political deadlock in the country could be resolved under a new President (Napolitano had certain powers removed towards the end of his term), however after five unsuccessful rounds of voting to confirm a successor, a cross party appeal for him to stand again saw the President unanimously become the first man to be re-elected for the position in Italian history. Although this now signals that some progress is possible in forming a new government, the euro didn’t react positively as one would have thought, with German media sources stating that the ageing President still has the difficult task of uniting an almost impossibly politically divided Italy. Focus switched to PMI data due to be released tomorrow, with speculation growing that the ECB could possibly cut rates at their policy meeting this week. ECB VP Constancio earlier in the day stated that a rate cut is always possible and is dependent on economic data, fuelling anticipation of such a move. Having opened in Asia up at 1.3080, the single currency has slipped once again to 1.3020 throughout the day.

USD/JPY: Despite last week’s comments from the G20 suggesting Japan has the all clear for their ultra-easing Abenomics and weakening of the yen to fight deflation, USD/JPY still failed to provide a test on the key 100.00 level today. Reaching a high of 99.92, strong offers in that region stopped the rally in its tracks, with the cross having since retraced lower once again to current levels of 99.15.

Outlook
USD: As we mentioned in our weekly newsletter, we still favour a stronger dollar over the coming days and weeks, especially against the GBP and EUR where we believe significant corrections are long overdue. Tomorrow could hold further selling pressure for the single currency, should the various European manufacturing and services PMI’s due for release fall short once again; now that there’s renewed speculation towards the possibility of an ECB rate cut perhaps even as soon as this week, poor economic data from Europe should finally come into the spotlight and answer to the critics for once.