16/01/'08 - U.S. Core CPI & Industrial Production On Tap.

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Economic News

USD

Yesterday the greenback continued its bearish trend against most of the majors, nevertheless it did eventually manage to rally back sharply against the EUR on the back of weak Eurozone news. The most significant news released from the U.S yesterday was the Retail Sales and PPI figures which both came in well below expectations. These soft figures once again raised concerns that the U.S economy is heading towards a recession and therefore the greenback slipped sharply on the back of these news releases, falling beyond the 1.4900 level against the EUR and continuing its dramatic slide versus the JPY. The greenback fell to a 2-1/2 year low versus the JPY yesterday as the current global growth problem is creating a risk-averse sentiment among investors and therefore we are now seeing a sustained carry trade unwind.

The greenback has been on a steep decline since last week Friday which was mainly driven by increased speculation of an aggressive rate cut by the Fed. Yesterday's weak U.S news only fuelled the fire once more as it seems that only an aggressive rate cut will save the U.S economy from increasingly likely recession. However it may not all be doom and gloom for the greenback this week as many major U.S banks will be announcing there quarterly earnings and already yesterday Citigroup reported quarterly losses which were less than what the market expected . Investors will be closely following these figures for an indication as to how deeply the credit crisis has affected some of the largest financial institutions in the U.S. The Citigroup surprise helped the greenback regain some lost ground against the EUR and if other major U.S banks also report smaller than expected losses then this will provide a boost for the U.S equitiy markets and therefore the greenback could also regain some ground against the JPY as carry trades will be back in action.

Looking ahead, there is another string of important U.S news releases today which will kick off with the CPI figures. Due to yesterday's disappointing PPI figures there is a strong possibility that the CPI figures will also release below expectations, as the producer prices are usually passed on to the consumer. This news release will be followed by the TIC Report, Industrial Production and the Capacity Utilization Rate. All these events will be closely followed by investors as any downside surprise will place the greenback firmly on the bearish express. Another important report to follow today will be the Beige Book, which is produced two weeks before each Federal Open Market Committee (FOMC) meeting to help guide the committee when setting short term interest rates. Now although the FOMC receives two other books that are not made public, the Green Book and the Blue Book and it is widely believed that the FOMC pays more notice to these private publications, investors will nevertheless be sifting through the report for future monetary policy clues. At the moment many analysts believe that the Fed will cut rates by at least 25-50bps at its next meeting on 29-30 Jan. The size of the rate cut will have a significant impact on the future direction of the greenback, so the economic indicators throughout today and leading up to that time are expected to cause sharp volatility as investors continuously adjust to the resulting ever-changing rate cut speculation.

EUR

Yesterday the main news released from the European economy was the German and Eurozone ZEW Economic Sentiment. These figures, which measure institutional investor sentiment, released at -41.6 and -41.7 respectively. This was below the forecasted figures of -40.0 and -37.8, which is an indication that at least 80% of market participants surveyed are pessimistic, in contrast to 40% that are optimistic, with regards to the European economic outlook. This negative sentiment can mainly be attributed to the fact that the strong EUR is beginning to dampen exports and therefore slowdown productivity and growth. Also the ECB is struggling at the moment to balance out growth and inflation, as the ECB has reiterated many times in its MPC meeting that inflation risks remain on the upside. Therefore on the back of this soft data the EUR depreciated sharply yesterday against most of the majors. Although it did initially bounce up beyond the 1.4900 level against the greenback on the back of weak U.S Retail Sales figures, it eventually got pulled down again as the negative sentiment surrounding the German and Eurozone economy prompted investors to sell the usually resilient EUR.

Looking ahead, the only news to be released from the Eurozone today will be the German and European CPI figures. Both these figures are expected to remain unchanged and should not have any noticeable impact on today's EUR movement, which will be more depended on some key U.S data releases. Also ECB President Trichet will give a speech later today and it will be closely followed by investors for hints on future ECB monetary policy. For the moment the main question on analysts' minds is how high the ECB will permit the EUR to rise before we see a direct policy intervention. It seems that negative U.S data could push the EUR beyond the 1.5000 level against the greenback but it is unlikely that the ECB will permit it to rise any further before intervening.

JPY

The JPY appreciated sharply yesterday on the back of the soft U.S Retails Sales figures. This negative news unsettled the global financial markets and therefore prompted carry trades to unwind further. Ever since the decline of the greenback began, the JPY has been gaining steadily all across the board and this is mainly due to the risk-averse sentiment that is got a stranglehold on carry trades. Earlier today, during the Asian trading session, there was more positive news for the JPY as the Japanese CGPI figure, which measures the rate of inflation experienced by corporations when purchasing goods, released at a beating expectations figure of 2.6%. This upside surprise is a positive sign for the Japanese economy as this rise in corporate inflation could be passed down to the consumer. The Japanese economy has been experiencing deflation in recent months and therefore this has been preventing the BoJ from seriously considering a rate hike, as an interest rate increase would further lower inflation. However if this positive CGPI figure results in an increase of consumer inflation then we may finally see a rate hike by the JPY, which will cause the Japanese currency to continue to appreciate sharply particularly against the high yielders.

There was more good news for the JPY as the Japanese Current Account released at 2.16T, beating the forecasted figure of 1.87T and this give further indication to investors that the Japanese economy is in a healthy state because such a current account surplus is mainly influenced by the large differential between exports and imports which in turn will positively influence growth. The medium term outlook for the JPY remains very much bullish and a reversal will only occur in tandem with the U.S financial sector.


Technical News

EUR/USD

The pair has corrected to the 1.4780 level, and now shows some positive momentum again. There is a bullish cross on the 4 hour slow stochastic which indicates that the bullish trend might return pretty soon. The daily chart supports the bullish notion, and it looks as if the pair is heading back to the 1.4900 level.

GBP/USD

The cable was looking for support at 1.9500 and found it, as a breach through that level was unsuccessful. It appears that a breach through that level would indeed validate an additional move, yet another failure to break might define that point as a potential reversal point for the ongoing downtrend.

USD/JPY

The very strong bearish trend continues with full steam and shows no signs of a halt. All oscillators are bearish and no bullish crosses appear in sight. It looks as if there is much more room to run and being on the short side appears to be very preferable.

USD/CHF

The very strong support level of 1.0900 was breached and validated the next move into the 1.0800 zone. Although on the short term charts there appears to be a correction up, the pair direction is down. The daily chart supports the bearish notion, and selling on highs looks like the right call today.


The Wild Card

Gold

After a very clear signal for a bullish bonanza, gold now makes a local correction, but still did not break the bottom barrier of the upwards channel on the 4 hour chart. Its inability to break the 887.00 level will provide forex traders with a great entry point for a long position with great profit potential.