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- British Pound the Weakest of the Majors as Gilt Yields Take a Hit
- Euro Down Despite Improvements in French Industrial Output, Investor Confidence
- New Zealand Dollar Dominates as RBNZ Rate Expectations Climb

US Dollar, Japanese Yen Gain Ahead of Bank of Japan's Rate Decision
The US dollar and Japanese yen were two of the strongest major currencies on Monday, just behind the New Zealand dollar, as uneasy risk appetite weighed on the S&P 500 and DJIA. The moves suggest that Friday wasn't necessarily a turning point for the greenback after the release of better-than-expected US non-farm payroll results provided a boost to both the currency and US equities, but with event risk due to pick up later in the week, we won't jump to conclusions.

Though not incredibly market-moving for the Japanese yen, it's worth noting that the Bank of Japan will announce their latest rate decision overnight. The BOJ is anticipated to leave rates unchanged at 0.1 percent, and while some economic indicators - including machine orders, industrial production, and manufacturing PMI - have shown signs of improvement, the central bank is likely to continue focusing on risks stemming from persistently weak domestic demand and deflation.

On August 12, traders will be watching the release of the Federal Reserve's rate decision. The Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, but the statement could spark heavy volatility if the FOMC announces an expansion of their QE efforts or an elimination of them. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher. Though highly unlikely, any change to previous wording that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period are sure to spark heavy volatility throughout the financial markets.

Related Article: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound the Weakest of the Majors as Gilt Yields Take a Hit
The British pound was the weakest of the majors, falling 2 percent against the New Zealand dollar and more than 1 percent versus the Japanese yen, Australian dollar, and US dollar, as gilts climbed and sent yields lower. The moves came days after the Bank of England expanded their quantitative easing (QE) program by £50 billion up to £175 billion. Indeed, recent financial data has shown that lending to non-financial corporations fell a record £14.7 billion during Q2 compared to Q1 while the annual rate of M4 money supply growth (excluding intermediate Offshore Financial Centers) fell 0.7 percentage points to 3.1 percent in Q2. All of this suggests that the central bank's £125 billion worth of asset purchases haven't had the desired effects of boosting money supply and increasing lending, but throwing more money at the issue seems to be a very risky bet. That said, GBPUSD ended Monday just above key support at 1.6450 while 240-minute and 60-minute RSI remained oversold, which indicates potential for a bounce in the pair overnight.

Related Article: British Pound Weekly Trading Forecast

Euro Down Despite Improvements in French Industrial Output, Investor Confidence
The euro traded on a mixed note at the start of the week, losing against the US dollar, Australian dollar, Japanese yen, and New Zealand dollar but gaining versus the British pound, Canadian dollar, and Swiss franc. There were no major economic releases, though data did show that French industrial production rose for the second straight month in June while the Sentix measure of investor confidence rose to a 12-month high in August. However, there are clear risks to investor sentiment in the future, as highlighted by Andreas Schmitz, president of the Federal Association of German Banks. Schmitz said that there is a concern and a real danger of another credit crunch, saying that he does not think it is entirely unrealistic to think there will be one. Schmitz went on to say that it is obvious that every bank will have more to deal with in the next 18 months, in terms of defaults by clients and non-performing loans, than they have had up to now. These issues are not contained to Germany either, as other European and US banks must contend with growing defaults and charge-offs as unemployment rates continue to rise.

Related Article: Euro Weekly Trading Forecast

New Zealand Dollar Dominates as RBNZ Rate Expectations Climb
The New Zealand dollar was the strongest of the majors on Monday, rallying nearly 2 percent against the British pound, as 10-year government bond yields soared to 5.927 percent, the highest since June 30, and Credit Suisse overnight index swaps shifted to price in 103 basis points worth of hikes by the Reserve Bank of New Zealand over the next 12 months, up from 88 basis points on Friday. One pair that will be worth watching is NZDJPY, as price made a bullish break above a falling trendline that connected the 2007-2009 highs at approximately 64.50, as well as the 38.2% fib of 97.81-44.23 at 64.67. However, with daily RSI at overbought levels, there is potential for a pullback in the pair to test support at the noted trendline.

On Thursday, the monthly reading of New Zealand retail sales for June are projected to reflect a decline of 0.3 percent, the Q2 result is anticipated to rise by 0.2 percent after a steep 2.9 percent drop in Q1, and it is this measure that could impact the New Zealand dollar the most. While a 0.2 percent increase isn't remarkable by any means, it would be the first improvement in consumption since Q3 2007 and an encouraging sign that the severity of New Zealand's recession is easing.

Related Article: New Zealand Dollar Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com