Forex Trading

The US Dollar extended gains against the Euro and the British Pound in overnight trading as an index of global stock performance tested key resistance, fueling demand for safe-haven assets. With no data on the economic calendar, risk trends are likely to dominate price action in European trading hours.

Key Overnight Developments

• Australian Producer Prices Unexpectedly Fell in the First Quarter
• UK House Prices Rose for Third Straight Month in April, Says Rightmove
• ECB’s Bini Smaghi Says 1% Is a “Credible” Floor for Interest Rates

Critical Levels



The Euro extended losses in overnight trading, testing as low as 1.2967 to the US Dollar. The British Pound followed suit, slipping as much as -0.7% against the greenback.

Asia Session Highlights



UK House Prices rose for the third consecutive month in April according to Rightmove, an online listing of for-sale properties. Still, it seems premature to conclude that the data is indicative of a robust, sustainable rebound in demand for big-ticket purchases, a development that would be reflective of buyers’ expectations that the economy will improve in the near future. Indeed, the latest data has seen consumer confidence return to record lows while NIESR, a think tank, said the economy shrank 1.5% in the first quarter and could “continue to decline for up to another year.” Prices declined -7.3% from a year ago, a smaller decline than last month’s -9.0% but a significant one nonetheless.

Australia’s Producer Price Index unexpectedly fell in the first quarter, bringing the annual pace of wholesale inflation to 15-month low at 4.0%. The reading points to downward pressure on consumer prices (the headline inflation gauge) as companies pass on lower production costs via cheaper finished goods, giving the Reserve Bank of Australia scope for to cut interest rates again as the economic downturn deepens. Although the central bank has signaled the easing cycle is over, Westpac Banking Corp’s chief economist Bill Evans said last week the decision to hold off lowering rates now is likely a tactical one given the confidence boost typically seen after such actions: “We expect the bank will see the need to have ample capacity to be cutting rates through the second half of 2009…The economic case for cutting rates is undeniable.” The Westpac Leading Index fell -5.1% in the year to February, the worst since 1982, convincing Evans that “the Australian economy will enter a recession.”

The ECB’s Bini Smaghi sounded notably hawkish in a speech today, warning against loosening monetary policy “too much” and saying that 1% floor for benchmark interest rates is “credible”. Smaghi added that he sees no risk of deflation – rather, he sees inflation expectations rising, not falling. The ECB member’s comments ought to be taken with a grain of salt, however, as he himself has noted as recently as this month that “[forex] markets are prone to episodes of overshooting and undershooting…public intervention in the form of public statements…may thus be warranted.” Last week, ECB President Jean-Claude Trichet also defended the a “measured approach”, saying this was key to restoring market confidence.

Euro Session: What to Expect



With no data on the economic calendar, risk trends are likely to dominate price action in European trading hours. The global equities rally that began on March 10th has taken the MSCI World Stock Index to resistance at the top of a falling channel that has contained prices since mid-October of last year. That metric is now -90.4% inversely correlated with the US Dollar Index, an average value of USD against six top currencies, suggesting that any reversal in risk appetite across global stock exchanges will boost the greenback further.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Advances Against Euro, British Pound as Stocks Meet Resistance (Euro Open)