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Dollar recovers, but Sterling’s a buy 26/05/2009

Posted by chrisdshaw in FX.
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The US Dollar has staged a recovery this week, clawing back some of its losses against most main G10 currencies, following what was beginning to look like a run on the US Dollar the end of last week. Although some return to the dollar was likely,with strong technical signals showing that the currency looked oversold, lower oil and equity futures have demonstrated the dampening down of optimism, and the testing of up to three nuclear missiles by North Korea has added geopolitical risk to the equation. A report on the German banking system in today’s UK Daily Telegraph, cited a German banking regulator, who said that Germany’s banks will blow up ‘like a grenade’ unless they take advantage of the government’s bad bank plans to prepare for the next stage of the crisis. EURUSD experienced the greatest sell-off in the European morning, falling from 1.4024 to 1.3867. GBPUSD fell 1.5950 to 1.5775. AUDUSD trade down from 0.7827 to 0.7725. All currencies subsequently gained against the USD later in the morning.

Concerns that the US may conceivably lose its AAA status following the S&P report on the UK and increasingly vocal concerns by the the Chinese led to nervous selling of the dollar last week. Although the dollar has recovered the spotlight will remain on the reserve currency, with analysts and investors keenly listening to comments from Bank of China officials about future purchases of the huge amounts of US government debt being issued. Over the next three days $101bn of US Treasuries, including $40bn today of 2 year notes, are being auctioned. How successful that sale is will be key to market sentiment over the greenback. Two other significant pieces of economic data out today are the Case-Shiller Index, expected at -18.% and Consumer Confidence, expected at 42.0. Although there are signs of a slowdown in house price declines and consumer confidence rose last month, risks are still firmly to the downside. The problem of trading EURUSD is that this also applies to the Eurozone. Sterling, on the other hand has so much bad news priced in- witness its remarkable recovery following the S&P report, that the currency is still a buy. A very light week for UK offers little event risk.

Best Trade:

Sell EURGBP: Spot: 0.8765, Target 0.8670 (200 Day SMA), then 0.8570. Stop at 0.8820

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