Dollar Bought as Manufacturing Contracts Across World

Once again, after being slightly wrong-footed last week, the market is turning its back on the Eurozone, selling the Euro in favour of the Dollar ahead of Thursday’s interest rate meeting from the European Central Bank.  Speculation that after a dire set of manufacturing and unemployment figures towards the end of last week the Bank will be forced into making a heavy cut to its headline rate alongside side a much more dovish forecast for the future has spurred an early morning Dollar rally, bringing EUR/USD down to the 1.33 level.  The added effect of ‘safe haven’ buying of the US currency further to diabolical figures from all major economic areas on Friday has also helped boost its value as the tentative bout of risk appetite fuelled buying which was seen last week is reined in.

The real killer on Friday, alongside previously mentioned industrial production figures from Europe, most notably France and Germany, was the added effect of colossal job losses over December from the United States with a Non-Farm payrolls figure worse than expected at minus 524,000 jobs.  This then further compounded an absolutely disgraceful UK manufacturing production figure of -2.9 per cent contraction over December, being much worse than anticipated by the market which was hoping for a more manageable -0.5 per cent.  It is thereby of little surprise that the Dollar strengthened heartily versus the Pound as well as the Euro over the weekend, bringing GBP/USD back into the 1.49 area.  Unfortunately, many large global investors were left with little choice but to plough swathes of funds into the Greenback as the exchange rate risk on other currencies this week looks increasingly frightening.

This week can expect the Dollar to continue to gather strength against most other major currencies ahead of the Eurozone interest rate decision on Thursday which will dominate the week’s proceedings with a likely trimming of 50bp.  The main focus though will be on the rhetoric spun out by the President of the Bank, Jean Claude Trichet, an infamous figure renowned for his stubbornness and absolute obsession with inflationary risk.  In line with this then the market is therefore unlikely to be too resolute in a Euro-sell off before the big day.  Also, the presence of some weighty figures from the US this week, including Retail Sales and Unemployment figures is also likely to keep Dollar gains fairly controlled on the other side of the coin.  Expect GBP/USD to move down towards the 1.47-1.48 level with GBP/EUR keeping some poise from Euro weakness but still ebbing away towards the 1.10 level with a possible rebound towards the end of the week.