The USD found backing on Wednesday and picked up strength against the EUR and GBP. The FOMC Statement released by the Federal Reserve made for a tentative market going into the publication. The Fed surprised no one when it left its interest rates alone. However, the FOMC Statement did say that while the economy has shown signs of stabilizing that the economy is not exhibiting many signs of growth. The statement also killed off the notion that an interest rate hike will be happening short term or midterm. Lastly the report acknowledged that energy prices have risen the past month, but emphasized that they believe demand relative to supply remains weak. While investors argued over the statement and tried to muster support for their various viewpoints, one thing is clear � the U.S. economy is still struggling and it appears that the Fed continues to be more concerned with the threat of deflation and poor growth than inflation at this juncture.
The USD did trade slightly weaker during the initial trading session yesterday, but as the day progressed showed that it was going to hold its ground. Core Durable Goods produced a better than expected result of 1.1%, bettering the estimate of minus -0.2%. However, the straw that broke the optimists back was the New Home Sales figures which produced a starkly lower number than projected coming in with 342K compared to the anticipated 360K outcome. What this number proved is that while Existing Home Sales may have stabilized given its earlier report this week, New Home Sales continue to struggle. Simply put the large inventory of Existing Homes available at low prices precludes any possibility for New Home Sales to show much improvement anytime soon. Too many homes available due to foreclosures and home owners having to sell at distressed prices are abundant because of the poor employment picture. Today the Weekly Unemployment Claim numbers are due and they are forecasted to be 602K, which would be a small improvement over last week�s result. Also the Final GDP data is on schedule today and an estimate of minus -5.7% is the projection. The equity markets turned in another lackluster day in the U.S. yesterday and this remains the telltale clue for the USD.
EUR
The EUR declined on Wednesday as the ECB announced that it would make 442 billion EUR available to banks in the European Union in order to facilitate better liquidity. The Current Account numbers were released for the E.U. and they produced a negative figure of minus -5.9 billion compared to the forecasted decline of -4.7 million. Today the broad Industrial New Orders statistics are on the calendar and are projected to be unchanged from the previous report. Tomorrow will see some inflationary (or deflationary) information from Germany as the case may be. Having gained on Tuesday after a poor day against the USD on Monday, the EUR was not able to sustain its performance yesterday as sentiment once again was given another sign that not all is well within the European banking system via the ECB�s action. While banks participating in the ECB lending yesterday proclaimed optimism that they were able to borrow money at a very low interest rate, it remains unclear if the ECB may in fact lower their key interest rate further. Though President Trichet appears loathe to cut rates more, the European Union is deep within its worst recession since the end of World War II, and he will be faced with hard choices in the short and midterm. The EUR will likely trade based off of the sentiment surrounding results on equity markets and any news generated from more speculation about the ECB. The EUR appears to be under pressure from the USD and may find it is pushed back further today.
GBP
The Sterling was taken lower on Wednesday as Bank of England Governor Mervyn King addressed the Parliament. Mervyn King stated that the U.K. economy faces many challenges and that the endeavor will be �a long, hard slog�. There will be little in the way of economic data from the U.K. today but the Nationwide HPI is on schedule tomorrow. Andrew Sentence, a BoE member, added during yesterday�s hearing that the economy has shown signs of stability but that this does not give an indication of how strong the recovery will be. Mervyn King added his voice to this matter, when he said that a recovery was �uncertain� and compared the recession to the economic condition of the 1930�s regarding an inability to foresee the future. The Sterling continues to maintain the stronger side of its range against the USD in the midst of this economic gloom. The actions of the U.K. government and the Bank of England to provide a semi-transparent window into the conditions of the financial sector has been one of its strong underpinnings. The GBP may find it is faced with headwinds however considering yesterday�s hangover via the sentiment brought about by Mervyn King.
JPY
The JPY lost ground to the USD as the Nikkei was able to produce better results than other equity markets due to news of a Japanese bank merger. However, the trading of the JPY and USD appear to be locked into the same solid range that the currency pair has maneuvered within the past few months. Gold traded up to the 935.00 USD mark on Wednesday even as the USD showed that it was not weakening. This highlights the possibility that Gold has a strong psychological support level and that within these markets that remain uncertain, could face a unique test in the coming days if international equity markets wobble and the USD gets stronger.
Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst