US Dollar Bounces Slightly During Range-Bound Memorial Day Trading

• Euro, British Pound Consolidate Below Recent Highs
• Japanese Yen Pulls Back as Bank of Japan’s Monthly Report Reflects Improved Outlook for First Time Since 2006

US Dollar Bounces Slightly During Range-Bound Memorial Day Trading
The US dollar was mixed versus the majors amidst low-volume holiday trading on Monday, as the currency consolidated its heavy losses from last week. Forex market price action should quiet up until the start of European trading on Tuesday. That said, RSI on the daily charts of the DXY index has fallen into oversold territory, and when this happened in December 2008 and March 2009, we subsequently saw price bounce higher. As a result, there is potential for the greenback to stage a stronger recovery versus the majors in the near-term, though it could ultimately be short-lived.

Beyond that, there will be a flurry of US economic releases on hand over the course of this week. On Tuesday, the Conference Board’s consumer confidence index for the month of May is forecasted to continue rising from its record low of 25.3 reached in February up to 43.0. On Wednesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose 2.0 percent in April to an annual pace of 4.66 million from 4.57 million. However, there are indications that the results could prove to be disappointing as the Commerce Department reported on May 19 that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000. On Thursday, US durable goods orders are projected to show that domestic demand may have increased slightly at the start of Q2, as they are forecasted to have risen 0.5 percent in April, but excluding transportation the index is anticipated to fall 0.3 percent.

Finally, on Friday, The second round of US Q1 GDP estimates are due to hit the wires, and the results could be market-moving. The preliminary reading is forecasted to be revised up to -5.5 percent from -6.1 percent, which also marks an improvement when compared to the Q4 2008 result of -6.3 percent. There is some evidence that revisions will be to the downside, though, based on the latest trade and consumption figures.

Euro, British Pound Consolidate Below Recent Highs
The euro and British pound generally consolidated their recent moves against the greenback, as EUR/USD fell within an intraday falling channel formation while GBP/USD traded between 1.5850-1.5920. Meanwhile, EUR/JPY pushed above 133, keeping the pair contained to a wedge formation, while GBP/JPY held above 150. The release of the German IFO survey – a gauge of sentiment on the services sector – showed much of the same patterns that we’ve seen in other confidence surveys like the German ZEW report. Indeed, sentiment on the overall business climate remained pessimistic at -5 in May, but did mark the second month of improvement. Looking to the components of the index, business expectations rose to -2 from -8 while sentiment on the current situation fell to -8 from -6, suggesting that while service providers are feeling the impact of the region’s recession, more of them are starting to anticipate that things will get better over the next six months.

There was no UK-related news today, but we did see on Friday that UK GDP was confirmed at -1.9 percent in Q1, the sharpest drop since 1979, while the annual rate was confirmed at -4.1 percent, which matched the Q4 1980 low. A breakdown of the report showed that private consumption fell for the fourth straight quarter at a rate of -1.2 percent, investment tumbled for the fifth straight quarter at a rate of -3.8 percent, and exports plunged by the most since Q3 2006 at a rate of -6.1 percent. The figures highlight part of the reason why S&P downgraded their outlook for the UK from “stable” to “negative,” and why the British pound could come under pressure once again in the near-term due to the bleak fundamental outlook. Indeed, when we see RSI rise into overbought territory, we tend to see at least short-term reversals, which could come as soon as this week for GBP/USD, and for that matter, EUR/USD.

Japanese Yen Pulls Back as Bank of Japan’s Monthly Report Reflects Improved Outlook for First Time Since 2006
The Japanese yen ended on a mixed note against the majors, but staged a notable decline shortly after 1:00 ET, while the Nikkei 225 rallied 1.3 percent. Most articles written about Japanese yen trade today references the drop in the currency as a result of North Korea’s reported nuclear test, but I would argue that the intraday move has more to do with a brief rise in risk appetite. Indeed, at 1:00 ET, the Bank of Japan’s Monthly Report was released, issuing an upgraded outlook for the first time since 2006. The report said that “economic conditions have been deteriorating, but exports and production are beginning to level out.” It is clear, though, that the BOJ sees foreign demand as being the only chance for recovery in Japan, as “private demand is likely to continue weakening with corporate profits and firms’ funding conditions remaining severe and a worsening employment and income situation.” While low-volume trading conditions aren’t necessary good for gauging what is truly going on in the market, the shift in FX carry trades in line with investor sentiment suggests that the Japanese yen may still hold their link with broad risk trends.

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Written by: Terri Belkas, Currency Strategist for

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