[B]Economic News
USD [/B]
The greenback continued Friday’s robust bullish run yesterday and it strengthened all across the board. The main driver of the bullish greenback has been the recent speculation that U.S inflation figures will be on the rise and may cause the Fed to be more dovish with regards to cutting interest rates at its next meeting. On Friday, both the headline and core CPI figures released significantly higher than last month and well above expectations. Therefore this upside inflationary surprise has got many investors believing that the Fed’s interest rate cuts have taken there toll on the market and that now inflation will begin to spike. The dollar has been booming on the back of these inflationary expectations, as now many analysts believe that the Fed may keep its key benchmark rate unchanged at its next meeting. Although the greenback’s yield advantage has suffered this year with the string of successive interest rate cuts by the Fed, it seems that going into the New Year the dollar could be in a strong position as the global growth concerns may prompt other major central Banks to cut rates or to at least leave them unchanged.
The greenback was given another boost yesterday by more favorable data as the TIC report, which measures the monthly difference in cross-border foreign and domestic purchases of long-term securities, released at 114.0B which was significantly more than the forecasted figure of 49.0B. This upside surprise elevated the greenback as it gave investors a good indication that there is rising foreign demand for the dollar. In other U.S news, the Current Account also released at a beating expectations figure of -179B which can mainly be attributed to the recent weakness of the greenback that has caused exports to increase significantly. Another dominant reason for the strong greenback yesterday can be attributed to the squaring off of year-end transactions, which is now driving dollar buying.
Looking ahead to today, we are expecting the U.S Housing Starts and Building Permits figures. These figures are expected to release lower than last month and they will be closely watched by investors for an indication as to how much the Fed rate cut has assisted the struggling housing sector. In recent months the housing figures have been on a downward trend and many analysts believe that it could still take a few months before the impact of the Fed rate cut is fully felt by the housing sector. Therefore the greenback may correct from its bullish path today if the housing figures disappoint. Nevertheless there are positive signs beginning to appear for the greenback, and today’s housing figures followed by Thursday’s GDP figures will paint a clearer picture of the state of the U.S economy.
[B]EUR [/B]
The EUR lost ground today against some of the majors, particularly against the greenback as investors paired off year-end transactions. The EUR also weakened noticeably against the JPY as the recent widespread carry trade unwind was once again favoured by traders. However it was not all gloom for the EUR because as a result of this heightened risk-aversion among investors the EUR strengthened against the high yielders. The EUR reached a low of 1.4330 against the greenback yesterday and will be in the interest of the ECB to let the 16-nation currency continue its long overdue downward correction. The main reason for this is because a very strong EUR could have long term implications on exports which will in turn affect manufacturing and growth. However the EUR should not be discounted so soon as there is a good possibly that we could see it once again trading at its all time high levels if the ECB decides to raise the interest rates at its next meeting. Nevertheless ECB President Trichet’s hands remain tied as long as inflation risks are still on the upside. The only news that came out of the Eurozone today was the Manufacturing and Services PMI figures, which disappointed slightly. These figures were not expected to cause market movement, but they provided another indication to investors that they may be some slight cracks in the Eurozone economy.
Looking ahead to today, the only Eurozone news will be the Trade Balance which is expected to release lower than last month’s figure of 3.9B, at 3.1B. This once again can be attributed to the sharp rise of the EUR over the last few weeks, as it has dampened European exports. We may see the EUR consolidate today after the last two day’s sharp losses, as news from the U.S is expected to be negative.
[B]JPY [/B]
The JPY strengthened all across the board yesterday, particularly versus the high yielders as carry trades once again began to unwind. The JPY recovered some of its recent losses against the greenback yesterday as risk-aversion was once again the preferred strategy by investors. The JPY rose to 113.20, on the back of weaker U.S equities coupled with rising inflation and dropping holiday retail sales speculation. The Bank of Japan will probably refrain from raising interest rates on Thursday after a drop in business confidence signaled that companies are bracing themselves for slower economic growth. The interest rate is expected to remain at 0.5%, which is the lowest among the major currencies making it a key player in the carry trade strategy. The direction of the JPY will heavily depend whether risk-appetite will return to the market, in the meanwhile it seems that carry trades may continue to unwind so the JPY could pullback some more of its recently lost ground.
[B]Technical News
EUR/USD [/B]
The corrective move continues at full steam, and the pair appears to be heading to 1.4350 and will probably look for support there. The hourly studies are still bearish, as the dailies are slowly shaping into neutral form. A break through the 1.4350 will validate a bigger bearish move to the 1.4270.
[B]GBP/USD [/B]
The cable continues to have quite choppy trading sessions with the pair’s direction downward. The volatility range is around 40 pips in width and the movement is revolved around 2.0200. Both hourlies and dailies are floating in neutral territory, which means that traders must look for entry points on the 15 minute chart and try to take short term positions.
[B]USD/JPY [/B]
The pair has been on a steady robust uptrend over the last 2 weeks and the bullish rampage is refusing to let up. Bollinger bands have widened indicating increased volatility. Therefore traders can expect today movement to be sharp. It appears that the USD/JPY is heading towards 114.00.
[B]USD/CHF [/B]
There is a steady upward channel appearing on the daily chart. The pair will once again target the 1.1600 level and if breached we could see another sharp move north. The hourly charts are also bullish, with a local resistance at the 1.1550 level that if breached will carry the pair into the 1.1620 on that move’s momentum.
[B]The Wild Card
Gold [/B]
There is a very impressive flag on the daily chart, as the final triangle is now forming. Gold is floating at the bottom of the flag indicating that the bullish break is imminent. This is a great entry point for forex traders, who wish to use a very strong and classic technical pattern that might produce high profit potential.