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• British Pound Falls Despite Rise in UK Rightmove House Prices
• Euro Mostly Stronger, Yet EUR/USD Decline Continues
• Canadian Dollar Drops Further - Canadian Retail Sales Could Provide a Fundamental Boost

US Dollar Strength Continues, Japanese Yen Down Ahead of Fed Meeting on Wednesday
The US dollar rallied once again on Monday, as daily RSI for the DXY index rebounded from oversold levels. Financial market price action reflected increased risk aversion, for the most part, as equities fell and the commodity dollars fell. That said, the Japanese yen was one of the biggest losers, which is unusual in that the currency usually rallies when carry trades fall. This was mostly attributed to the fact that Japanese markets will be closed through September 23 for various holidays, but the divergence may only be temporary as correlations frequently shift day-to-day.

The US dollar could continue to gain ahead of the Federal Reserve's meeting on Wednesday, when the central bank is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent. The FOMC started saying in January that they continue to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time, and they're likely to repeat this phrase once again. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. Such statements have historically been bearish for the US dollar, but the statement ultimately shouldn't ignite significant volatility unless the FOMC announces a change to their QE program or starts to signal a bullish bias for interest rates down the line.

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British Pound Falls Despite Rise in UK Rightmove House Prices

The British pound remained under considerable pressure against the US dollar and euro at the start of the week, continuing last week's trend. UK data was actually surprisingly strong, as the Rightmove House Price report showed that home prices rose 0.6 percent in September, which pushed the annual rate up to a 15-month high of -1.5 percent from -3.1 percent. The data is in line with other UK housing indicators that have shown increasing prices in recent months, suggesting that demand may finally be starting to pick up.

Nevertheless, the overriding concern for the British pound is the UK's deteriorating fiscal health. Last week, data showed that public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling's full-year forecasts for a deficit of 175 billion pounds. Standard & Poor's already downgraded the UK's credit outlook to negative from stable in May because of their budget woes, and while they've also said that they would reserve any judgment on potential downgrades until the next general election, mounting deficits don't bode well for the nation's golden AAA credit rating. Ultimately, this leaves a long period of time open for speculation on the prospects for the UK's credit rating to reign supreme, which may make the already-volatile British pound even choppier.

Related Article: British Pound Weekly Trading Forecast

Euro Mostly Stronger, Yet EUR/USD Decline Continues

The euro held its own, for the most part, on Monday as the currency only slipped against the US dollar as it continued to pull back from 1.4750. There was no economic data on hand, but the currency will face event risk on Thursday as the German IFO survey on the business climate is projected to rise to a one-year high of 92.0 from 90.5, led by rising expectations and mild increases in sentiment on currency conditions. Indeed, a steady rally in European equities though July and September to the highest levels since October 2008 along with indications of burgeoning economic growth in Germany is likely to underpin the case for a rise in business sentiment. Surprisingly strong results could lead the euro to gain following the news on a very short-term basis, but disappointing data would likely have a greater impact, and could trigger sharp declines in the currency.

Related Article: Euro Weekly Trading Forecast

Canadian Dollar Drops Further - Canadian Retail Sales Could Provide a Fundamental Boost

The Canadian dollar led the declines for the commodity block, as the currency fell roughly 1 percent against the greenback as oil plunged nearly 4 percent and carry trades took a hit. However, data on Tuesday may show that Canadian retail sales rose for the third straight month in July at a rate of 0.7 percent. However, any increase may be due almost entirely to auto sales, and excluding this component spending is projected to rise only 0.1 percent. Such results would be in line with the Canadian wholesale sales report for the same period, as the overall index jumped 2.8 percent, but excluding autos the index rose 0.9 percent. All told, a rise in retail sales of 0.7 percent or more is likely to contribute to Canadian dollar strength, at least on a short-term basis. On the other hand, lackluster readings could drive the commodity dollar lower.

Related Articles: Canadian Dollar Weekly Trading Forecast, New Zealand Q2 GDP Outlook

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Written by: Terri Belkas, Currency Strategist for