The US dollar faces substantial event risk, but this week is a bit different from others as the release of economic indicators may prove to be rather unimportant. Instead, the greatest threat to the US dollar is the fate of Fannie Mae and Freddie Mac. Shares of the two mortgage giants plummeted after Friday’s stock market close amidst speculation that the US Treasury will announce plans to inject capital over the weekend. If this is indeed the case, the news could trigger a bout of flight-to-safety, sending Treasuries higher and the US dollar, stocks lower, and the Japanese yen crosses down (like the Bear Stearns announcement back on Sunday, March 16). Clearly this will be an event worth watching.

Regarding the standard economic releases on hand, US pending home sales are anticipated to slip as demand for properties remains weak. Meanwhile, the trade balance for the month of July is likely to reflect a wider deficit, as oil prices were still high during that period and may inflate the import figure. On the other hand, the plunge in commodities during August may help lead producer price growth to slow on Friday, as raw material costs drop. Also at the end of the week we’ll have advance retail sales and University of Michigan consumer confidence, both of which are anticipated to show mild increases thanks to falling gasoline prices. Overall, though, there are downside risks for these reports as well given the dismal status of the US labor markets.

Written by Terri Belkas, Currency Strategist DailyFX.com

Euro Reversal Depends On ‘Relative’ Outlook For Rates And Growth

Has the euro already reached the point of no return? This is the question traders will have to ask next week when liquidity returns to the currency market. There is certain to be a growing call among the speculative base for a necessary rebound from the battered currency since it has plunged nearly 1850 points or 11.5 percent against its US counterpart since hitting record highs less than two months ago. However, despite the new week, the fundamental argument for EURUSD will be the same: which currency is attached to the better interest rate and economic forecasts (a similar measurement being used across the FX market).

Recently, the US dollar has been looking less sickly. For comparison, second quarter numbers showed the US economy marked a sharp rebound to expansion while the Euro Zone saw its first quarterly contraction since the euro was introduced. From an interest rate perspective, forecasts for the Fed were steady with two quarter-percent hikes due by the same month a year for now; while the ECB – despite the constant harping on inflation was expected cut by just as much. This may change in the days and weeks ahead though. While the outlook for the European policy authority continues to fade (as it should), the optimistic FOMC forecast is also starting to fail. With commodity prices easing and global growth cooling, Fed Fund futures have started to price in an 11 percent chance of a cut by December. What’s more, on the growth front, the US revival isn’t likely to hold through the second half of this year. So, while European expansion may continue to decelerate, it is the outlook for the US that can falter the most. It’s always a relative trade for the currency market.

Elsewhere in fundamentals, the scheduled docket may generate some buzz for the euro. Thursday’s reports will have the greatest impact on the economic outlook. The ECB’s September report will likely reflect the ruminations from Trichet in his prepared statement and public address last Thursday. The European Commission’s growth forecast on the other hand could come with surprises, though the ECB’s downgrading the 2008 outlook from 1.5-2.1 percent to 1.1-1.3 percent and 2009 forecast from 1.8.-3.0 percent to 2.3-2.9 percent could certainly use some clarification (because they look somewhat optimistic at this point). The only other indicators that have a chance to move markets will be the quarterly employment report and the German trade figure.

Written by John Kicklighter, Currency Strategist DailyFX.com

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