Currency Briefing: Dollar steady as investors evaluate Syria and Fed move

on Sep 5, 2013
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The dollar moved steadily lower against the euro on Wednesday as investors weighed the bearish possibility of a U.S. attack on Syria as well as the bullish likelihood that the Federal Reserve will begin tapering its bond-buying program this month.

The U.S. Commerce Department reported earlier in the day that the U.S. trade gap had widened more than expected in July, due to both increased imports and soft exports. Separately, uncertainty over U.S. plans to spring military strikes against Syria softened the dollar in some extent as well.
U.S. President Barack Obama has asked for a Congressional nod to begin limited strikes against Syria for its supposed use of chemical weapons on Aug 21 against protestors that killed more than 1,400 people, though he said earlier Wednesday that he does not need approval to strike, which softened dollar demand.

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Meanwhile in Europe, two optimistic releases had the euro bouncing back towards 1.3200. Eurostat reported that the euro area’s retail sales rose 0.1 per cent in July from the 0.7 per cent contraction reported in June. Additionally, the statistical office of the European Union reported that the euro area`s GDP rose by 0.3 per cent in Q2, in line with expectations and the preliminary reading published in mid-August.

The euro is under considerable selling pressure these days after the support at 1.3205/1.3186 (38.2% retracement of the move from July) has been eroded. Only an unexpected rise above last week`s high at 1.3453 will allow gains to the 1.3500/20 region. Analysts believe it is a hardly realizable scenario unless a military attack is enhanced against Syria, supported or not by a broad coalition, or unless the ECB press conference surprises the markets in a startling way.

The ECB rate decision and the subsequent press conference of the central bank’s President Mario Draghi will be the key event closely followed by the markets today. The ECB rate decision is scheduled as usual at 08:45 BST, whereas the press-conference is to be released at 09:30 BST. The benchmark rate will remain unchanged at 0.5 per cent as widely expected by a number of survey polls. Mr. Draghi providing “forward guidance” as part of his newly launched communication initiative, together with specific verbal clues, would determine today’s market impulsiveness. Mr. Draghi` s assessment of the economy will come in an environment of confirmed growth in Q2 of 0.3 per cent on a quarter-over-quarter basis, and record high unemployment statistics of 12.1 per cent in the euro area.

Thursday is expected to provide other interesting events, such as the ADP non-farm payrolls change (09:15 BST), the U.S. Factory orders (11:00 BST) and the ISM non-manufacturing index (11:00 BST).
Private-sector employers added 200,000 jobs in July, which was significantly above expectations. The ADP data is generally perceived as a predictive of the key market driver, the non-farm payrolls, scheduled for release on the first Friday of the month, following the reported period. An upbeat reading will certainly convince investors the Fed is ready to taper as early as September, therefore giving additional strength to the dollar.
The services side of the U.S. economy will likely expand in July after a surprise deceleration in June, according to economists` polls. The ISM non-manufacturing index is forecast to rise 53.1 per cent, up from the prior reading of 52.2 per cent.
As largely discussed in our latest briefings, more U.S. positive news will indicate more bullish sentiment on the dollar as they imply the high probability the Fed will finally launch the unwinding of its stimulus program that amounts to $85 billion in monthly asset purchases.

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