The dollar fell initially after last weeks poor CPI data, but managed to reverse early loses latter in the session on Friday, eventually closing up against the euro at $1.2929 but down against the yen at ¥86.57. On Monday the dollar was more or less range bound against most currencies and there was little news and no economic data releases to impact the market. Risk trends are likely to drive price action this week instead of data. US equity indexes are down in the first hour of their sessions and the wave patterns point to the possibility of a protracted decline. A drop in market sentiment would certainly spark another flight to safety, which could produce a bullish breakout in the greenback. Prices at midday stood at $1.2951 against the euro and ¥87.04 against the yen.

   The euro traded mixed on Monday shrugging off bad news after Moody’s rating agency downgraded Irish sovereign debt from an Aa1 to Aa2 because of the government's "gradual but significant loss of financial strength". The euro continued to hold firm after the break down of talks between Hungary and the EU and IMF as Hungary refused to implement austerity measures to reduce their deficit. This has had the resulting effect that that IMF has cut off any emergency funding to Hungary. The Hungarian Forint dived after the news. This could have implications for many Hungarians who have debt such as mortgages denominated in Swiss Francs or Euros. The Euro has been riding high after a string of successful bond auctions last week and it even managed to breach the 1.30 level on Friday temporarily. It remains to be seen whether the euro can hold onto its gains as many analysts are now beginning to argue that the currency is over valued. The results of the euro zone bank tests on Friday will no doubt affect the market although a positive result may already have been priced in. At midday on Monday the euro was up to $1.2951 against the euro and was up to ¥112.72 against the yen.

   The pound was down on Friday after risk aversion saw a flight to save haven currencies, falling to $1.5298 against the dollar and ¥132.43 against the yen. Today the decline continued after data from the internet giant Rightmove showed UK house prices fell in July for the first time this year. Asking prices fell by -0.6% while the YoY rate dropped to 3.7%. Hawkish comments from BOE board member Andrew Sentance during an interview on BBC Radio may give hope of another boost to sterling in the not too distant future. Sentence said a “gradual” rise in interest rates would help to temper the risks for inflation, adding that the central bank will have to take the appropriate steps “to support the recovery” as households continue to face tightening credit conditions and poor employment prospects. At midday the pound was trading at $1.5282 against the dollar and £0.8481 against the pound.

   Despite making big gains on Friday following fears sparked by a string of poor economic data from the US bringing into doubt the strength of the recovery, the yen started the new week down slightly after yet another stat showed a possible drop in Japanese growth. Nationwide department store sales were down from -2.1% to -6.0% YoY in June. Later in today’s session, however, the yen began to strengthen again after US equities turned down at the open. If the trend down in equities continues then the resulting risk aversion could be quite bullish for the yen. At midday the yen was trading at ¥87.04 to the dollar and ¥112.72 to the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst