USD Softer, Awaits Data by Korman Tam

The currency market has much to digest this week as traders look ahead to monetary policy decisions from several central banks, including the BoC, RBA, BoE and ECB. The greenback relinquished some of last week’s gains in early Monday trading, slipping against the sterling and yen. The major currency pairs will likely be dictated by a combination of sentiment over global interest rate differentials as well as any new revelations from the subprime debacle and credit crisis. Fed Chairman Bernanke’s comments last week heightened market expectations for a December rate cut. It remains unclear however, whether the anticipated ease will be a 25-bp or 50-bp cut. The economic reports over the coming week will be particularly important with the FOMC deliberating policy next Tuesday. In the session ahead, traders will look ahead to the November manufacturing ISM – forecasted to slip to 50.5 from 50.9. The main highlight this week will be Friday’s labor report, with non-farm payrolls forecasted to drop sharply in November to 75.0k, versus 166.0k from October.

Sterling Propped Higher By Manufacturing Data

The sterling bounced off its lows against the dollar to recover above the 2.06-level after an upbeat manufacturing report assuaged sentiment for a rate cut when the Bank of England announces its policy decision this week. The CIPS manufacturing PMI in November unexpectedly jumped up to 54.4, beating calls for a decline to 52.5 from the 52.8 reading in October. The data also revealed further pressure in prices, with input prices climbing to its highest level since July to 64.4 from 60.8, while output prices edged up to 57.5 versus 57 a month earlier. The new orders component improved to 55.6 from 53.8 in October, it’s highest since August.

Cable rebounded sharply after touching 2.0527 earlier in the session, buoyed by the unexpectedly strong manufacturing growth. The key highlight this week will be the Bank of England’s monetary policy announcement on Thursday morning. Although we look for the BoE to leave rates unchanged at 5.75%, given the recent commentary from MPC officials, the decision is likely to be a close one. MPC officials have highlighted the difficulty in setting policy as a result of lingering inflationary pressure and the anticipated “sharp slowdown” in UK economic growth. Further, recent inflation reports were stronger than forecast – likely to keep the BoE’s hand in check this week. Yet, depending on how grim the Board members interpret the current subprime debacle and credit crunch to be, the possibility for the Bank to alleviate the impact of tight credit conditions by easing rates remains.

GBPUSD encounters interim resistance at 2.0665, followed by 2.07 and 2.0740. Additional ceilings will emerge at 2.08, backed by 2.0830 and 2.0860. On the downside, support begins at 2.06, backed by 2.0570 and 2.0530. Subsequent floors are eyed at 2.05, followed by 2.0450 and 2.04.