The USD has been facing selling pressure over the last couple of weeks, the removal of the threat of full scale military action against Syria saw safe haven demand fall, whilst a run of weaker than expected data from the US has seen many scale back their taper expectations. On Friday this data run did not improve, US retail sales for Aug grew only .2% versus .5% expected whilst the U of Michigan confidence survey posted one of its lowest readings in 5 months, at 76.8 versus 82 expected.
Over the weekend the USD has come under even further selling pressure as Larry Summer, the favourite to take over Ben Bernanke’s role as Fed Chairman in January, withdrew himself from consideration. Vice Chair Janet Yellen steps into the favourite place but this has put the USD under pressure as Summers commented publicly that the new favourite is likely to more accommodative than he would have been.
This is a big shock especially as we enter such a major week for the Fed, who begin a two day policy meeting tomorrow. We still feel the Fed are likely to taper by $10-15 bln, bringing their monthly asset purchases down to $75/70 bln, recent USD positioning does not appear supportive of this view and the USD may well be setting up for a large rally should there be a surprise on Wednesday.
Last week was light on Eurozone data, headline figures have shown signs of improvement across the region but the major problems remain, unemployment remains a major problem and those peripherals weighed down by austerity measures continue to struggle. There has been concerning headline news surrounding Greece and Cyprus, however market tends to ignore European mumblings these days.
There have been plenty of ECB members voicing their thoughts also over the last week, and while many do see signs of improvement they are quick to point out that the region has not escaped the debt crisis and downside risks still remains. Today we have Eurozone inflation data due for release. Current levels remain below the ECB target of 2%, we expect a small uptick in inflation of .1% for Aug bringing the year on year figure to 1.3%. Anything lower may see the EUR under pressure as the market increases calls for further rate cuts for the region.
We have seen some key technical level broken towards the end of last week, most notably in Pound crosses. EURGBP broke back down below the key .8400 level on Friday and finally managed to close the week lower. This drove the pair to lows of .8356. We have seen plenty of corporate sellers of GBP below .8400 with EUR heavily in demand.
The strong run in GBP has also driven GBPUSD above 1.5900, 1.6000 is a key level to the topside and this will be a target for many. UK data later in the week may see this recent run put under pressure but again for now we are seeing plenty of GBP sellers and USD buyers taking advantage of rates not seen since January of this year.