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Currency Outlook: USD Looks Strong as Holidays End

POSTED BY:
Alberto M.

DATE:
09/01/2014

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Holidays are over and September begins with an impending geopolitical risk increase in Euro from the conflict in Ukraine and the threats on the commerce between Europe and Russia.

The economic attention will be focused on Frankfurt next Thursday for the European Central Bank’s (ECB) press conference on its Monetary Policy Making meeting. The comments from Mario Draghi at Jackson Hole, last weekend, have increased expectations on ECB’s policy decision. According to Draghi’s words, the Euro approaches the feared deflation, leading to a slowdown of the economic growth and an increase of unemployment in Europe. The recent announcements on Germany’s economy confirm this prediction.

Tomorrow, Mario Draghi meets French President François Hollande in Paris. A few days ago, French Prime Minister Manuel Valls called for more action from the ECB to lower the value of the Euro to stop deflation.

Germany’s weak economic information releases and French pressure on the ECB’s President suggest that a change in the Euro policy is likely to happen. The ECB may try to reduce the overvaluation of Euro with respect to USD. In order to accomplish this objective, either a reduction on interest rates or quantitative easing (QE) could be adopted at this Thursday meeting.

From a geopolitical viewpoint, the growing turmoil due to the Ukrainian Crisis in Europe is weighting even further Europe’s economy. This increases Europe’s concerns for deflation and slowdown of its growth, which may be a key factor in the decision of the ECB.

With regards on the other major currencies, the decisions on rates from the Bank of England, Bank of Japan and Bank of Canada will also determine the evolution of foreign exchange markets. United States economic health will be checked again this week with the releases of important macro economic data and PMIs of key sectors.

USD Outlook:
This week most important information releases in United States are the Trade Balance and the Unemployment claims, Thursday 12:30. As every first Friday, the US Unemployment and Non-Farm and Private Payrolls will be disclosed. The recent announcements of economic data from US exhibit a positive trend, and this is expected for the near future.

Unemployment rates in the US are decreasing, and the reduction in imports has made USD stronger. The upgrade of Q2 GDP growth to 4.2% and the increase in consumer confidence to pre-financial crisis levels suggests a positive week for the USD. USD will present a good evolution this week.

EUR Outlook:
The Euro Zone is about to start an increasingly bearish week until next Thursday ECB’s press conference at 12:30, when the ECB’s President Mario Draghi will announce the new monetary policy for the Euro. The slowdown of European economy and the increasing turmoil due to the Ukrainian Crisis suggest a dark future for the Euro. All the news and indicators point out that this will be a bad week for the Euro.

GBP Outlook:
The Bank of England lowered its forecasts for wage growth for 2014. Since there is no outlook of inflation increase in England, the expected outcome from next Thursday BoE Monetary Policy Making meeting is that there won’t be any change in rates. However, the economic situation in Europe may have an impact on England’s growth. For this reasons, the GBP weekly prediction is mediocre.

JPY Outlook:
Japan’s economic growth is still hindered by last April consumption tax hike, as the fact that Japan economy and GDP contracted between Q1 and Q2 reveals. The decrease in exportation last June adds to this trend. Nevertheless, the inflation target of the Bank of Japan is still doable, so the odds are that rates will not change after the Monetary Policy Meeting of the BoJ next Thursday. The outlook is that this week will be mediocre for Japanese Yen.

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