Euro and Pound Gain; Yen Holds in Thin Range
Just as we saw yesterday, the dollar edged lower against both the euro and pound while nudging higher against the yen. This light holiday trading week has left the majors to merely wander, as EUR/USD managed to climb from an Asian session low of 1.3105 to a high of 1.3151 in early European trading while GBP/USD fought to rise above the 1.9600 level with the help of solid economic data. UK Nationwide house prices gained more than expected at a rate of 1.2%, bringing the annual rate to surge to a 23-month high of 10.5%. It appears that the two 25 basis point hikes by the Bank of England in 2006 have had little effect on the booming sector, which has fed into broader based inflation pressures and will likely keep BOE hawks on edge in early 2007. However, if diminishing affordability for potential homebuyers begins to make an impact, weakening demand could lead house prices to ease on their own and subsequently decrease the probability of monetary policy tightening.
Meanwhile, yen maintained a thin range of 118.60 — 118.90, and price action was not remotely contingent upon the economic releases for the day. USD/JPY barely moved as Japanese industrial production missed estimates at 0.7% for the month of November while labor cash earnings plunged 0.7% for the same month. The data only reiterates the problem of companies not passing on record profits to their employees, which has put the Bank of Japan in a dicey position, as consumption has little hope of picking up in these conditions. Nevertheless, the BOJ is anxious to start normalizing rates again, but whether they are willing to tighten monetary policy without the impetus of inflation or spending growth remains to be seen. Given recent data, it appears far more likely that the BOJ will have to wait until at least February or March before moving 25 basis points higher to 0.50%.
The US calendar is jam-packed with data today, with Chicago PMI, consumer confidence, and existing home sales all on tap to be released. After the sharp drop in the Philadelphia Fed manufacturing survey last week, the Chicago PMI report could remain in contractionary territory. However, there is a chance that we may see some strength in consumer confidence as the combination of low oil prices and a strong equity market fuel overall optimism. Additionally, yesterday’s jump in new home sales could point to an unexpected improvement in existing home sales.
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.