Written by Terri Belkas, Currency Strategist
The US dollar has spent the past week consolidating within thin ranges, as low volumes did little to spark directional trade. This left the greenback down 1 percent against the euro and up roughly 1.5 percent versus the British pound and Japanese yen by Friday’s close.
US Dollar Consolidation Could Yield Breakouts as Liquidity Returns
Fundamental Outlook for US Dollar: Bearish
- US personal spending contracted for the fifth straight month in November as jobless claims held near 26-year highs
- US durable goods order fell less than expected, helped by an increase in defense spending and business investment
- US retail sales tumbled during December despite aggressive discounting, according to SpendingPulse
The US dollar has spent the past week consolidating within thin ranges, as low volumes did little to spark directional trade. This left the greenback down 1 percent against the euro and up roughly 1.5 percent versus the British pound and Japanese yen by Friday’s close. In the coming week, the US markets will be closed on January 1 for New Year’s Day, and low liquidity conditions could persist as scattered financial markets around the globe will also be closed on Wednesday and Thursday. Meanwhile, there will be a bit of event risk on hand, leaving potential open for volatility to pick up a bit.
On Tuesday at 9:00 ET, the S&P Case-Shiller Home Price Index for the month of October is anticipated to fall by a record 17.8 percent from a year earlier, highlighting the extent of the collapse in the US housing sector. At 10:00 ET, the Conference Board’s Consumer Confidence Index for the month of December is expected to edge up to 45.5 from 44.9. This would mark the second improvement in a row, but it’s necessary to keep these figures in perspective, as the record low of 38.8 going back to 1967 was just realized in October, down significantly from the index’s average of more than 100 throughout 2006 and 2007. Indeed, the outlook for consumption remains bleak, especially as aggressive discounting by retailers was not able to prevent holiday spending from slumping 4 percent in December from a year earlier (excluding gasoline), according to SpendingPulse. On Wednesday, initial and continuing jobless claims are likely to hold near their highest levels since late-1982, boding ill for the January 9 release of US non-farm payrolls. Finally, on Friday, the Institute for Supply Management’s index of manufacturing conditions during December may fall to the lowest levels since 1982, while the record low of 29.4 reached in May 1980 looms close below.
Euro Could Gain This Week, But Long-Term Outlook Remains Bearish
- ECB Governing Council Member Nowotny says he can’t rule out further rate cuts
- The Euro-zone's current account deficit narrowed to 6.4 billion euros, thanks to lower oil prices
The euro spent the majority of the past week consolidating versus the US dollar between 1.3915 and 1.4125, and these levels remain the proverbial lines in the sand, as a break above or below the bounds will suggest that price will continue to move in that direction. However, given the pair’s slow and steady climb from the December 19 low of 1.3826, it seems more likely that the EUR/USD rally could extend beyond 1.4125 toward 1.4300 once volumes pick up again.
From an event risk perspective, there’s nothing on the euro’s side of the coin to prevent such a move. The only indicators due to be released include the Purchasing Managers’ Index results for the Euro-zone’s retail and manufacturing sectors, both of which are anticipated to reflect the worst conditions on record. Nevertheless, these do not tend to be very market-moving for the euro, leaving technical analysis as a better method to use this week.
In coming weeks, though, traders should keep in mind that the European Central Bank is still anticipated to cut rates yet again on January 15, as Credit Suisse overnight index swaps are pricing in a 50bp reduction to 2.00 percent. The fact of the matter is that price growth has slowed dramatically and recession is plaguing the Euro-zone’s biggest economies. While credit conditions have improved in recent weeks, the potential for instability still lingers and the ECB may want to confront this head on with more accommodative monetary policy. As a result, further gains in the currency should be heeded with caution, as the long-term outlook suggests the euro may have further to fall.
Japanese Yen May Strengthen On Declining Global Outlook
- Industrial Production Fell 8.1% in November, Which Was the Fastest Pace in 55 Years
- Inflation Slowed To 1% From 1.7% in November
- Japanese PMI Fell To 30.8 from 36.7, Which Was the Lowest Since Records Began In 2004
The Japanese Yen lost ground to the dollar for the first week in two months as Japanese fundamental data signaled that the economy is headed into a prolonged recession. Indeed, industrial production declined 8.1%, which was the fastest pace in 55 years. Additionally, the record low PMI reading of 30.8 leaves little hope that activity in the world’s second largest economy will rebound in the near-term as companies continue to pull back in the face of a recession. The release of the BoJ minutes revealed that the committee had discussed taking on credit risk a month before they started buying short-term debt following their announcement of a 0.2% rate cut. Policy makers stated that the increasing difficulty of Japanese companies to obtain credit due to “deteriorating markets” forced them to take further action. Yesterday, Bank of Japan policy board member Hidetoshi Kamezaki said officials may consider “extraordinary steps” to improve access to funding for companies.
The USD/JPY would rise to as high as 91.30 last week where it ran into resistance at the 20-day SMA. The failure to break above the short-term technical indicator may be a sign that investors are still reluctant to abandon their Yen long positions. The deteriorating fundamentals globally have increase fears that the current global recession will continue to deepen which remain a dampening factor on risk appetite. The lack of Japanese economic data on the docket and the New Year will leave many traders on the sidelines setting up for another week of low volume. However, we could see bargain hunting and year end buying fuel a bout of risk appetite. Where a break above the 20-day SMA may lead to a change in bias and further Yen losses.
Fundamental Outlook for British Pound: Bearish
- 3Q GDP Revised to -0.6% from -0.5%
- British Pound Tests Record Low Against Euro
The British Pound continued its move towards parity against the Euro and slid lower against the U.S. Dollar ahead of the New Year, which suggests that investors remain bearish against the currency as market participants widely expect the Bank of England to lower borrowing costs even further in January. Nevertheless, financial uncertainties paired with the ongoing downturn in the housing sector is likely to stoke increased selling pressures for the currency over the near-term as the economic calendar continues to reflect a dour outlook for growth.
The lowest interest rate since 1951 highlights the extraordinary efforts taken on by the central bank, and market participants anticipate policymakers to ease policy further as they do everything possible within their authority to mitigate the downturn in the economy. A Bloomberg News survey shows that 27 of the 38 economists polled anticipate BoE Governor Mervyn King and Co. to lower the benchmark interest rate by 50bp to 1.50% at the January 8th policy meeting. Meanwhile, weakening fundamentals have certainly dragged on the British Pound throughout the second half of the year, and the event risks scheduled for the following week could weigh on the currency as growth prospects deteriorate at a rapid pace. The BoE’s housing equity withdrawals index is projected to fall to -3.3B from -2.8B in the second quarter as a result of tumbling home prices paired with tightening lending practices, while consumer credit is expected to decline to 0.6B from 0.8B in October. As credit conditions remain far from normal, private sector spending, which is one of the biggest drivers of growth, is likely to remain subdued throughout the coming months, and would only heighten the downside risks for growth going forward.
From a technical standpoint, the British Pound is expected to remain range-bound in the week ahead, and should hold major trends against its currency counterparts over the near-term. Accordingly, as investors round-trip their open positions for the year, thin markets are unlikely to impel a drastic shift in trader sentiment, and the Sterling is likely to face headwinds ahead of the event risks scheduled for the coming week.
Source : Dailyfx.com
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