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The Conference Board’s index of US consumer confidence for January came in at 110.3, modestly above market consensus expectations of 110.0. December’s Consumer Confidence was upwardly revised to 110.0 from the previously reported 109.0. The report continues showing a strong divergence between consumers’ perception of the present situation and the expectations component. While the first rose to 133.9 from the previous 130.5 reading, the later dropped 1.8 points to 96.3. Yesterday we mentioned that despite the significance of the report and its market moving potential, the market’s reaction might not be as significant due to the heavy flow of data we are expecting today and the days that follow. And indeed, in spite of the better than expected results, market’s reaction was very tame, making the USD fluctuate in a mere 14 pips range against the EUR between 1.2947 and 1.2961 and in a 16 pip range vs. the GBP, between 1.9607 and 1.9623.

The US economic calendar today is far heavier, and the data due out is also much more significant. The flow starts at 13:30GMT with Q4 Gross Domestic Product, which is expected to climb 3% following the economic recovery recent months’ labor market and manufacturing sector indicators have suggested. Also due out at the same time is the Q4 Personal Consumption Expenditure data, as well as Employment Cost. Following a 90 minute break Crude Oil inventories will be released, and then, at 19:15GMT the Federal Open Market Committee’s interest rate decision. It is certainly going to be a very interesting day for the dollar, a “make or break” day. Although all figures are expected to come in strong, one must take into account that recent USD gains over other currencies were mainly driven by expectations for such quarterly figures. Hence, these expectations (or perhaps even stronger than these) should be already priced-in in current USD value. This, in turn, means that in order for the USD to appreciate significantly it might require a significantly better than expected figures, and anything less might generate an opposite knee-jerk reaction in a “buy the rumors sell the news” style.

The FOMC interest rate decision is expected to be dollar bullish, the question is how bullish. It is widely expected that the Fed will leave interest rates unchanged (It is not in the Fed’s style to catch the market’s by surprise the way the Bank of England did earlier this month), but given the insinuated rebound (by economic indicators) in the economic situation and rising concerns about a second round of inflationary pressures, the Fed might return to hawkish rhetoric. If this scenario, which is not at all groundless, materializes, it would certainly send the USD to surge higher.

EUR

It is not the European calendar that dominates this week, and evidence for that were provided both yesterday and today. Yesterday, German Retail Purchasing Managers Index fell 11.3 pts to 43.9 and the preliminary German CPI for January fell 0.2% on expectations of a 0.2% rise. Earlier this morning, YoY German Retail Sales fell 0.2%, on expectations of a 0.8% rise, and annual German CPI came at 1.6%, much lower than the expected 2.1% and back within the European Central Bank. Despite the fact that all these releases were quite EUR negative, it did not matter to the EUR much as it remained buoyed above the 1.2950 level.

There are a few more indicators due out from Europe today, among which are the Economic Sentiment and Euro Zone Harmonized CPI. Of the two, the latter is a more of market driver, but given the dominance of the US calendar this week and the significance of the US data today, we expect any EUR devaluation that might follow to be far more noticeable against other currencies rather than against the USD.

JPY

Earlier during the Asian session, Japan Manufacturing Purchasing Managers Index came at 53.4, higher than the previous 53.1 reading. Later released, Construction Orders fell 5.6% but Housing Starts and Housing Permits rose 10.2% on expectations of a 8.6% rise. These proved to be extremely JPY bullish, which gained nearly 60 pips against the USD following these releases, and over 150 pips vs. the GBP and the EUR. As of late, the direction of the Japanese economy is not very clear and estimates vary between a continuing recession and a modest rebound. The better than expected result reignited hopes that the second scenario would materialize. The JPY value, however, will be determined through the remainder of the day by external events arriving from both Europe and the US. Weak European data might make way for further JPY appreciation, while strong US data expected might provide a sufficient reason for a rebound.

Curtesy of Forexyard.

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USD

Yesterday’s US economic calendar was devoid of any meaningful events, and nonetheless the USD devaluated against most counterparts, a devaluation that was mainly prompted by a sharp drop in oil and energy prices. The USD thus gave back some of the gains it had made the previous week and returned to trading above the 1.2950 level against the EUR and 1.96 level against the GBP. This, however, signals no more than a repositioning for dollar traders, ahead of this week’s tons of data USD traders await tomorrow’s GDP and Fed interest rate decision, as well as important inflationary data in the figure of the PCE (Personal Consumption Expenditure) and the Employment Cost Index. Today is thinner on US releases and the only one scheduled is the Conference Board’s Consumer Confidence, which is expected to hit a 5 year high. Lower Energy costs, tiding stock markets, and a strong labor markets are among the reasons that could drive such a rise in Consumer Confidence, which, in turn, is positive for the USD because optimistic consumers tend to spend more at the stores, consumption that eventually leads to economic growth. Although we expect the figure to come as strong as, and maybe even stronger than consensus estimates, the market’s reaction might prove to be somewhat restrained due to the far more important data due out in the upcoming days. A downside surprise, however, might aggravate USD declines, though probably not too strongly.

EUR

On a calendar also empty of meaningful events, the EUR found support in hawkish rhetoric by ECB officials that has been later confirmed in a speech made by the European Central Bank governor Trichet. Trichet commented on the accelerating money supply growth and the still-existing upside risks for inflation. By doing so, the governor signals the markets on a Q1 interest rate rise in the Euro Zone, a rise that can take place even as soon as February. Today’s most significant data release from Europe will be the German Consumer price Index that is expected to bounce back above the ECB comfort zone. On an annual basis, the CPI is expected to come at 2.2%.

In the UK, the GBP was weaker against the majors after one of the BoE members said that the soft labor market can push wage growth lower and cool inflation pressures. Even the firm CBI trade survey yesterday wasn’t good enough for the GBP as both the ECB and Federal Reserve are likely to be hawkish in their upcoming statements. However, the strong survey suggests that the retail sector is still holding up to the economy and raising rates is still part of the shrug equation.

JPY

Yesterday, the JPY was trading around a 4 year low against the USD as consumer spending in Japan came out weak, raising more doubts about whether the Bank of Japan will lift interest rates next month. Domestic spending has long been one of Japan’s biggest problems because even though corporate profitability has increased, there has been minimal wage growth; keeping prices unchangedMeanwhile, Japanese household spending fell a surprisingly big 1.9% in December, casting some doubt on whether consumption recovered in the fourth quarter as much as economists had originally expected. JPY weakness is therefore likely to continue today as well, with the currency’s only hope being the Manufacturing Purchasing Managers Index scheduled later today.

Curtesy of Forexyard

 

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