Since July there has been a measurable deterioration of real economic activity, in the United States in particular but also in China and a few other nations.
Investor pessimism and concern over economic trends and seemingly ineffectual governance compounded with the political impasse in the U.S. government are reducing capital expenditures, new business and real estate investments, and consumer spending, and economic growth and are threatening to push the U.S. economy into a new recession.
It is not clear that this trend will result in an actual recession, but real economic activity clearly is suffering and the odds of much weaker economic performance in the United States have risen sharply.
The upcoming U.S. midterm elections will worsen matters: They are likely to be extremely negative and should be expected to increase investor and consumer pessimism further.
In this environment, the dollar already has halted the strong recovery that began at the end of 2009. The dollar is likely to trade sideways in a wide and volatile fashion over the next few months, with a possible range for the rest of this year of $1.15 to $1.40 against the euro.
Investors’ concerns over U.S. economic trends will be countered by caution over European and Japanese economics.
Euro
The euro may trade between $1.25 and $1.29 this week. The euro moved in this range last week and could continue to do so in the next few trading sessions.
Soft economic data from the United States last week outweighed Standard and Poor’s recent downgrade of Irish sovereign debt. Increased Spanish bond sales to international banks last week reduced the country’s reliance on the European Central Bank, boosting confidence among investors.
European equity values have been trending lower over the past few weeks, but recently began to climb higher. Downside concerns remain, however. The cost of insuring against sovereign debt default in Europe continues to trend higher.
Increasing uncertainty in financial markets and weakening investor sentiment toward economic conditions could push the euro lower if these investors decisively moved back toward the dollar this week. Economic data from the U.S. to be released this week could increase volatility, pushing the euro outside of the above stated range.
Rupee
The rupee may trade sideways to higher this week. The rupee has been trending lower since the beginning of August and could continue to face weakness amid rising uncertainty in financial markets and weakening investor sentiment toward emerging economies and risky assets.
Indian equity values fell last week after having trended higher this month and the Sensex settled below 18,000 for the first time since 30 July on 27 August. GDP for the second quarter of this year is set to be released on 31 August and could support the rupee.
Domestic economic prospects have been positive so far this year. Inflation is expected to be curbed by improved crop output over the next few months. A rise toward 216 cents could occur, although continued negative economic data being released from the United States and Europe would likely restrain the rupee’s rise this week.
Pound
The pound may consolidate around $1.55 this week. The pound fell slightly below $1.54 last week after a member of the Bank of England’s monetary policy committee signaled the economic recovery in the United Kingdom may be slowing.
The pound then recovered to $1.55 later in the week as the second quarter GDP growth estimate for the United Kingdom was revised upward to 1.2% year-on-year from the previous estimate of 1.1%.
While the government’s recent efforts to draw down its fiscal deficit pushed the pound to a high of nearly $1.60 in early August, investors may have begun to question the sustainability of the recent economic recovery in the United Kingdom. This may keep the pound subdued in the near term.
Yen
The yen could move around 118 cents this week. The yen rose as high as 119 cents early last week before falling back below 118 cents on 27 August. Bearish sentiment over the United States economic recovery continued to drive safe-haven demand for yen.
Speculation that the Federal Reserve might step in with more monetary easing helped the yen rally. The yen at current high levels is increasingly vulnerable to Japanese government intervention, and to market speculation that the government may intervene.
Policymakers in the Japanese government and the Bank of Japan have agreed on the need to prevent further yen appreciation. The Japanese Prime Minister is expected to announce additional stimulus measures in early September.
Unless these measures are significant enough to turn market sentiment the yen could retain some upward momentum in the near term.
