The euro could test support levels this week. After climbing for two months to close at a peak of $1.3279 on 6 August, the euro fell 4.0% to settle at $1.2753 on 13 August. Investor sentiment toward economic conditions for the second half of the year were downgraded last week, both before and as a result of the Federal Reserve commenting that it sees softer economic conditions than it had anticipated earlier.
The European Central Bank (ECB) echoed the Fed, cautioning that euro zone growth also may be lower than previously expected, despite the positive results announced last week. Renewed concerns regarding sovereign debt problems also weighed on the currency, overshadowing positive economic data released on Friday.
The euro zone grew at a 1.0% rate in the second quarter from the first quarter of 2010, which was led by a 2.2% growth rate in Germany. Rising problems and increased focus on sovereign debt issues in Europe could push the euro lower.
The ECB was reported to have purchased Irish government bonds last week, aiming to calm credit conditions. The euro may find support at $1.26, but a decline toward $1.25 is possible. Any gains in the euro may be capped at $1.30.
Indian Rupee / Dollar
The rupee may trade between 212 cents and 215 cents per 100 rupees this week. The rupee fell sharply last week, as investor sentiment toward developing economies weakened amid expectations of reduced economic global activity for the remainder of the year. A move toward safe haven assets weighed on the rupee.
The rupee will continue to be sensitive to investor sentiment toward developed and developing economic prospects. High inflation and a widening trade deficit in India continue to worry investors.
A reduction in capital inflows to India’s markets amid softening economic growth prospects could push the rupee lower, possibly toward 210 in the near term.
Sterling Pound / Dollar
The pound may consolidate around $1.56 this week. The pound fell from $1.60 last week on worse than expected economic data that suggested the economic recovery in the United Kingdom may be slowing.
The Bank of England (BOE) cut its gross domestic product (GDP) growth forecast for 2010 to 1.6%, down from its earlier estimate of 1.7%. Weaker GDP growth estimates may compel the BOE to enact further economic stimulus measures, which could weigh on the pound.
The government’s efforts to cut its fiscal deficit meanwhile should provide some confidence in the currency, but such budget balancing may weigh on future economic growth prospects and the pound.
Japanese Yen / Dollar
The yen is likely to test 115 cents this week. The yen touched 118 cents last week, as concerns over euro zone debt problems increased safe haven demand for the currency. The yield on Japanese 10-year government bonds remained at low levels.
By last Friday the yen moderated to around 116 cents, following comments from the Japanese finance minister suggesting the government may act against any further strengthening of the yen.
The Bank of Japan (BOJ) performed a rate check last week, which involves inquiring about commercial bank currency transaction details, fueling speculation that the BOJ may take currency intervention measures. Such a move has preceded some previous government currency intervention actions.
The second quarter gross domestic product figure, scheduled to be released this week, is expected to show slowing economic activity. This may remove some support from the yen.
