FXstreet's  Instablog

FXstreet.com (Córdoba) - Amid light economic news stream, the dollar is consolidating last week's losses in narrow ranges on Monday, while stocks markets are narrowly mixed.

The euro holds near a 4-month high of 1.2811 scored at the weekly opening as sentiment towards the shared currency improved after last week the ECB announced a plan to cut borrowing costs for indebted euro zone members.

Dollar vulnerable ahead of FOMC

Meanwhile, the US dollar remains vulnerable ahead of the FOMC policy meeting that ends on Thursday, as speculation the Fed could announce another round of quantitative easing (QE3) increased following a disappointing job report last Friday.

"In the wake of Friday's soft payrolls report, our US economists now think the Fed will announce another round of asset purchases this week, of at least $500bn, and will also extend the commitment to keep the Fed funds rate exceptionally low into 2015", says the UBS analyst team. "We consequently expect the dollar to trade heavy as Thursday's FOMC meeting approaches, though with the constitutional court ruling and the Dutch elections out beforehand, the euro itself may also find upside drivers somewhat lacking".

Meanwhile, according to BBH analysts, "Given the heightened risk of a balance sheet response to the recent economic weakness by the Federal Reserve, barring the German Constitutional Court knocking down the ESM, which we think highly unlikely, especially given parliament's approval and the speculation that Spain may formally request aid at the Eurogroup meeting late in the week, the dollar may remain under pressure", although some cautiousness by short-term momentum participants is in order.

Weak China's data weighs on stocks

Over the weekend, China reported that industrial output fell to its slowest pace in 3 years in August, while CPI ticked up for the first time in five months. Meanwhile according to BBH, news of a wider trade surplus ($26.6 bln from $25.1 bln) was a function of a small increase in exports (0.6% on the month) and an unexpected fall in imports (-0.3%).

Worries over a slowing global economy in the wake of disappointing Chinese data weighed on global equities. Wall Street indexes edged lower at the opening, pulling back from multi-year highs. The Dow Jones fell 0.2%. The S&P lost 0.1% while the Nasdaq declined 0.3%.

In Europe markets moved modestly lower, with the Euro Stoxx 600 down 0.3%. However, Asian markets were mixed to slightly higher after disappointing data from China boosted hopes for more stimulus measures.

Gold fell 0.4% to $1,732.60 an ounce, while crude-oil futures declined 0.6% to $95.85 a barrel.

Risk events this week

"A more cautious mood and relatively tight trading ranges are probably explained by significant event risk this week", says the Wells Fargo team. On Wednesday, the German Constitutional Court rules on the European Stability Mechanism, while Dutch national elections are also taking place the same day. On Thursday, the Federal Reserve is due to make its policy announcement, accompanied by the latest macroeconomic projections. "While we expect a positive outcome from the European events, a negative ruling by the German court is a low probability but potentially high impact event", Wells Fargo comments.

Meanwhile, expectations for Fed easing this week are already elevated and there could be scope for some disappointment if the Fed underdeliver, according to Wells analysts.

"On balance however, we believe last week's upturn in risk sentiment should remain broadly intact going forward. Although global economic data is yet to show meaningful signs of improvement, monetary authorities around the world have been stepping in more decisively to support growth and financial market sentiment, which should play out in favor of most foreign currencies in the months ahead", they conclude.

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