US Dollar (USD) Barely Moves in Quiet Trade
A very quiet start to the week in the currency markets as the majors moved about listlessly in 30 point ranges for most of the night. The global calendar offered little new information with only a smattering of second tier releases on the docket. The one interesting piece of data came from UK where Rightmove House Prices jumped 0.5% on a month over month basis and 13.5% on a year over year comparison. The news allayed any worries of a potential slowdown in the UK housing market which were first triggered last week when the RICS survey disappointed to the downside. With Rightmove data behind them, cable bulls have the wind at their back, as UK economic data continues to show remarkable resilience and begins to build a strong case for more BoE rate hikes to follow. For now however, the GBP/USD continues to be stymied at the 1.9770 level as all of the good mews appears to be baked into the pair. Traders will want to looks at tomorrow’s CBI Industrial Trends report and the upcoming release of the BoE minutes to better handicap the chances of further tightening in the coming months.
In Japan the economic news showed further weakness in the consumer sector with supermarket sales declining by —3.8% from year prior while convenience store sales fell another —0.2%. Kyodo News reported that BoJ faces an uphill battle trying to raise rates in the current environment, a factor that could drive the yen to further lows against the euro, yen and the pound. The Japanese calendar offers little event risk this week, save for the CPI data on Thursday night. If the inflation results demonstrate a positive month over month gain, BoJ hawks would gain an upper hand and the chances of a rate hike could increase, but overall the pace of Japanese monetary policy appears to be painstaking slow as authorities refuse to commit to full scale tightening in the face of very tepid consumer demand.
Finally euro and the dollar appear to be stuck in a tug of war around the 1.2900-1.3000 level. US data has produced mostly positive surprises last week, but the greenback failed to make any progress as reserve diversification put a bid underneath the euro. With the pair trading near the point of its breakout in late November, many central banks have turned bargain hunters trying to take advantage of favorable prices. However, the interest rate landscape has changed dramatically since that time. With US data surprisingly strong, market expectations of a Fed rate cut have been pushed back to the second half of 2007. Meanwhile, ECB’s hesitancy to raise rates in February suggests that the European monetary policy makers may be tempering their hawkish attitude in light of the fact that energy costs have fallen sharply, and the growth in the region’s vital export sector is slowing due to appreciating currency values. In short, the market is far more confident that the Fed will not lowering rates than the ECB will raise them and that in turn provides euro bulls with far lees ammunition going forward. At least until this week’s IFO which may be the marquee report of the week.
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.