Dollar To Strengthen Across The Board

USD/INR fell on Thursday snapping its three-day winning streak on inflows from state run utility and bunched up dollar sales from foreign banks after public holidays. The rupee’s recovery was slightly aided by WPI data for October which came in at better than expected print of 7.45%. Strength in EUR/USD pair also helped bolster Rupee. However, Rupee still looks shaky as Euro-zone worries will increase dollar demand. On the other hand, IIP and Current account deficit problems will pressurize Rupee. Though, WPI surprised, it is still too early to predict a sustained fall in Inflation rate. As for today, the upside will capped around 55.10 levels. A range bound trading is expected.

EUR/USD
Despite weak GDP data for the euro area as a whole, the releases for Germany and France surprised to the upside. Market participants are also likely reconsidering their outlook for EUR/USD in light of yesterday’s FOMC minutes release. The euro dollar has gained 0.5% over the past two sessions, initially on the removal of near term risk arising from concerns over Greece, and subsequently supported by growing expectations for additional QE from the Fed in 2013. However, the outlook for the euro area is weak; given that it is in technical recession following two consecutive quarters of contraction most recently an as-expected decline of 0.1% q/q in Q3.

The annual rate of inflation in the Euro zone eased in October as the price of gas fell, but remained well above the ECB's target. Consumer prices rose by +0.2%, m/m, and by +2.5%, y/y. Despite the annual rate of inflation being down from +2.6% in September. Policy makers do not seem that worried, recent data suggest that inflation should fall below their desired level by the mid of next year. This should then give Euro policy makers the green light to apply further stimulus to their flagging economies. Overall we maintain our bearish view on Euro with short term target of 1.2630.

GBP/USD
The GBP/USD is trading at 1.5850 fairly flat, moving between small gains and losses after a disappointing retail sales print. Retail sales data have come in below expectations and as market participants consider the outlook for the UK’s credit rating following the release of an annual update from Moody’s. The rating agency, which maintains a Aaa (outlook negative) rating for the UK, has stated that they will ‘revisit’ their analysis in the first few months of 2013. U.K. retail sales dropped more than expected in October on the decline in food and clothing sales. Consumers remain under pressure with the weak labor market and unstable inflation outlook, especially after the BoE said that inflation over the shorter term is seen higher than forecasted in the August inflation report. Moreover pace of wage growth is struggling to keep up with rise in inflation rate. The U.S. dollar is a bit weaker also after a day of mixed eco reports with unemployment on the negative side.

USD/JPY
Yen continues to be the weakest currency this week on prospect of unlimited easing from BoJ. The sell off started yesterday when current Prime Minister Noda said that he will dissolve the parliament, which would in turn trigger an election. According to latest poll, the ruling Democratic Party of Japan might lose to opposition Liberal Democratic Party in the election. And indeed, some press are already calling LDP leader Abe, the former prime minister, the next prime minister. Abe is known to be advocating more aggressive easing from BoJ. USD/JPY rose to six-month high above 81 levels yesterday. Yen is expected to remain weak against major currencies. USD/JPY has immediate support of 80.69. Pair can rise to 81.90 levels.