Technical Bounce Props USD by Korman Tam

The greenback found some respite in the Tuesday session despite little positive news to alter the US economic outlook. The dollar rebounded from an 18-year low against the Aussie and recovered toward the 1.4140 level versus the euro. With another bout of dismal housing data, we perceive today’s move as a technical one and a pause to further decline over the coming weeks.

The August pending home sales report showed continued deterioration, falling by greater than consensus forecasts, down 6.5%, albeit an improvement from July’s 12.2% fall. Traders will look to tomorrow’s August non-manufacturing ISM reading, durable goods orders, jobless claims, and factory orders. We expect continued weakness in the aforementioned figures, deteriorating from the previous reading. The key highlight for the week continues to be Friday’s September labor report, with FOMC policy moves likely to be derived from the result.
Euro Relinquishes Gain on USD Bounce

The euro drifted against the dollar overnight to a session low at 1.4140 amid a technical dollar bounce from oversold levels. Economic data released from the Eurozone had little impact on the currency market as the outlook for the ECB decision later in the week remains unchanged. The August unemployment rate held steady near its lows at 6.9% while producer prices were in line with expectations at 0.1% m/m and 1.7% y/y.

The ECB is set to deliberate monetary policy on Thursday and is unlikely to change interest rates. The key highlight will be the subsequent press conference at 8:30 AM from Bank President Trichet to determine whether additional policy tightening can be expected.

In light of recent economic data, particularly the German Ifo, the impact of previous rate hikes are becoming evident in the reports and may prompt the ECB to adopt a less hawkish tone. It will also be interesting to note if any mention of exchange rates will be made -- reinforcing the growing unease among Eurozone officials of the continued strengthening of the single currency, deemed to be detrimental to export competitiveness.

Economic data slated for release from the Eurozone in the coming session will see Germany service PMI, Eurozone service PMI, and August retail sales. The service PMI numbers for both Germany and the Eurozone are seen declining in September to 54.0 and 56.8, respectively. Retail sales, meanwhile are forecasted to improve on a monthly basis to 0.4% from 0.1% and stand pat on an annualized basis at 0.5%.

Aussie Pulls Off 18-year High

The Australian dollar retreated against its American namesake after advancing to an 18-year high at 0.8946, succumbing to a rebound by the greenback. The Aussie has staged a sharp rally in the past 3-months, appreciating by 16.6% from its August 17th trough at 0.7673, benefiting from a combination of robust global demand for commodities and overwhelmingly bearish sentiment surrounding the greenback.

The Reserve Bank of Australia is set to announce the results of its policy setting meeting at 7:30 PM, with the RBA seen holding interest rates unchanged at 6.5%. Inflation in Australia remains a key concern for the Bank and if the next round of CPI figures reveals another jump higher – the RBA will be largely expected to lift its benchmark lending rate by 25-basis points in November. Recall the annualized September CPI reading jumped up to the top of the RBA’s 2-3% target band at 3%, bolstering the prospects of another hike before year-end. We maintain our bullish outlook for the Aussie, with a medium-term target of 0.91.