Euro and Pound Drift Higher

It appears traders are attempting to avoid the holiday traffic and have left their desks early this week, as the overnight session saw muted volatility with both the euro and pound drifting higher while yen went essentially unchanged. Since the greenback’s gains in the New York session on Thursday, GBP/USD has slowly crept towards 1.9700, despite yesterday’s rumors of an impending terror attack in London over the holiday weekend. Meanwhile, EUR/USD has bounced back above the 1.3200 level on mixed economic data out of the Euro-zone. German CPI data out of the states of Bavaria and Hesse both jumped 0.8% during the month of December &150; a one year high. However, the annual rates held at more tepid levels of 1.3% and 1.7%, respectively, as the monthly increases were the result of seasonal factors and leaves expectations for the broad German CPI measures at 1.6%.

The Japanese Yen showed little reaction to the minutes of the November 15-16 Bank of Japan MPC meeting, which yielded no surprises, as they continued to focus on the need for economic and price moves to match the expectations expressed in the BOJ’s semi-annual outlook report from October. Additionally, MPC members agreed that the Bank should explain carefully that the timing of any policy change depended entirely on developments in economic activity and prices as it should not be thought that the timing was predetermined. Following comments from BOJ member Atsushi Mizuno just a few weeks ago who said weak economic data won’t prevent the bank from increasing borrowing cost, the minutes speak a less hawkish tone. Clearly, their hesitance indicates that the central bank needs more substantial evidence of price pressures and rising consumption before they can commit to a rate hike to 0.50%.

The US has quite a few economic releases of note due out today, with personal spending, personal income, durable goods and PCE core on tap. A rebound in durable goods orders following last month’s dismal decline of 8.3% along with a buoyant PCE core reading could keep the greenback propped going into next week, as most market participants will be out on holiday on Monday and Tuesday, if not the entire week. However, if traders find US data disappointing, the US dollar could go into 2007 on a sour note.

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.