After opening higher in Asian trading the US dollar gave back its gains versus the majors. The notable mover of the day is the Swiss franc as the USD/CHF reached a new all-time low while the safe-haven franc has made significant inroads versus the euro. Sterling is lower as traders anticipate tomorrow’s Q2 UK GDP numbers.
US debt concerns are weighing on market sentiment in the forex market as traders move out of higher yielding currencies and into the safe-haven Swiss franc. As of last Thursday traders were eagerly seeking out higher yielding assets given prospects for debt resolutions in both Europe and in the US. Over the weekend a breakdown in US debt negotiations have reduced expectations for a compromise but most are still expecting some sort of agreement to be stitched together to stave off a default in the world’s largest economy. This can be inferred from both US Treasuries and equity prices. The US 10-year is stronger at 2.96% while European equities are little changed and S&P futures look to open only slightly lower. If markets were beginning to price in a default by the US pressures would likely be felt in both the fixed income and equity markets.
However, forex markets have responded otherwise with traders bidding the Swiss franc to a new all-time high versus the US dollar. Strong gains for the franc were also seen versus the euro after the EUR/CHF failed to close above its 20-day moving average last week. Against sterling the franc has moved sharply as the GBP/CHF encroaches on the pair’s all-time low at 1.3037.
Prior to tomorrow’s Q2 GDP report sterling has fallen versus the dollar but the GBP/USD remains within its last two day’s trading band. UK GDP is expected to slow with consensus expectations for a feeble 0.2% gain. Given the belt tightening in the UK budget and falling PMI numbers a decline in UK growth would not be too far-fetched. The pound could remain on its back foot should UK GDP come in below consensus forecasts, thus boosting the BOE’s case for an ultra-loose monetary policy and an additional round of quantitative easing despite a headline inflation rate of 4.2%. This may knock the GBP/USD lower back to the July 18th low at 1.6000, a level that coincides with a 61% retracement target from the July low to last week’s high. Resistance comes in at 1.6370 from the previously broken trend line off of the May 2010 low.
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