Independent Analyst: Lena Manousarides 3rd November

publication date: Nov 4, 2008

This Week Will Either Make or Break Dollars Recent Rally!

What a big week we have ahead of us, what with important economic data out of US and Europe and also the long awaited rate decisions by ECB and BOE which are expected to shake things up for the currencies.

Let’s not forget that tomorrow is the big day for US as the next president will be chosen and that can really affect the market outlook by far more than traders expect. The latest financial woes are still fresh in traders’ minds and therefore all eyes will be on the next President in order to determine how they will deal with the US and global crisis. There were several speculations that the dollar strength these weeks had to do with the elections and when the elections are over, the dollar will weaken once again to reflex the fundamentals. This is just a speculation though and we shall see what happens tomorrow and how traders will welcome the election results. There is a lot of talk amongst traders that republicans favor a weak dollar and especially the Bush administration was all for that. However with a new person in power from either party, markets are not aware of their agenda and so until they are sure of their strategy, markets will be very unpredictable.

Today the economic calendar has some important releases later on, with ISM Manufacturing out of US which again is expected to print a really negative number. We don’t expect any surprises on the upside from the data as the latest numbers suggest US economy is heading for recession. In the morning we had PMI out of Euro zone which was worse than previous month and also PMI out of UK which came better than expected but failed to move the pound. Traders await Kings Testimony later today, which along with Alistair Darling they will testify in front of the parliament for the state of the economy and the financial crisis. The sterling will fall further if their tone is dovish and that might signal a bigger rate cut later this week.

EUR/USD hovers between 1.28 and 1.29 and traders are not very keen on committing either way in the pair just yet, as they have a long week ahead of them. The pair needs to take out 1.2930-50 before we can say that there is further gains towards 1.30.As long as 1.27 holds we can see further gains for the pair, however if the latter level gives way then next target may be 1.2630 or even 1.2580.

The Japanese yen is still on the defensive since early European session and the fact that today Japan was closed due to bank holiday combined with gains in the rest of Asian markets made investors sell the yen.

It will be interesting to see where this week will lead currencies and if tomorrow’s election outlook put a dent in dollars recent rally. Whatever happens tomorrow one thing is for sure: dollar has plenty of reasons to get weak in the coming days, as NFP is expected at the end of the week to print -200.000 jobs! That alone is a big deal for economic conditions as it will be now the 10th month that payroll data is negative which will formalize the fact that US was, is and will be in recession.