The lack of US data helped the dollar run on new concerns stemming from a new chapter in the Greek saga and softness in U.S. equities. The biggest loser by far against the dollar was the pound which was pummeled on news that the Bank of England retains their pessimistic stance on the economy. The euro did not fare to well either, suffering its second consecutive loss. Nevertheless, gains against the yen prove to be elusive, with the dollar eking out only a small rally. Stock markets reflected the overall lax in risk tolerance, submitting to its first loss in eight sessions. Going into trading next week, the health care debate will surely be fresh on everyone's minds. The house is expected to hold a vote for the bill on Sunday, which could signal big step forward or back depending on the results. Nevertheless, traders will undoubtedly grapple with concerns that the plan will weigh heavily on the economic recovery. Concern is understandable considering that the bill will cost nearly a trillion dollars to put in place, and even though the non-partisan Congressional Budget Office says that the proposals will actually shrink the deficit, the details remain highly suspect. The fact of the matter is that the US is holding a very fine line in its deficits to the point where ratings agencies will step in to continuously batter officials for their fiscal negligence. Even though a downgrade is not imminent, added attention to deficit problems could be a drag on the dollar. Furthermore, in order to produce these promising deficit reduction estimates, the bill contains new taxes that could conceivable constrain consumer spending before it ever poses a true recovery. Obviously, the health care battle will mean a lot for currency traders next week as much of the dollar's future could be held in the balance.
A Look at What's to Come
Next week has a lot in store in the form of crucial economic data. The week starts with the release of Existing Home Sales on Tuesday, and with the housing market beginning to falter, we could definitely use a shot of confidence provided by a strong number. On the same day, more will be provided with respect to housing in the form of the House Price Index. Wednesday follows the Existing Home Sales number with New Home Sales. Again, markets need to see some signs of stability in the market. We will also be met with Durable Goods Orders, which will be an important indicator of the manufacturing industry. Friday rounds out the week with the third release of fourth quarter Gross Domestic Product, which should reinforce the rosy optimism that pervaded in recent reports with growth exceeding the 5.0% mark. Furthermore, we will have the University of Michigan report on Consumer Confidence, which will serve as an important leading indicator for next month's NFP report.
EUR/USD: CLASH OF TITANS
Uncertainties stemming from the pending Greek bail-out have sent the euro sharply lower for the second straight day, ending a period of contraction that has characterized trading for the last couple of weeks. It is becoming more and more apparent that the Euro-zone is sharply divided as to how to deal with Greece's problems. Responding to German President Angela Merkel's comments from the other day about seeking IMF support, France reiterated their interests to prevent anything but a European Solution to address the problem. However, the divide in Europe is not necessarily characterized by Germany pitted against France. A spokesman for the German Finance Minister said today that he would "view IMF assistance with great reservation." Clearly, the matters are not even aligned in Germany's own government. The split was also seen between European Commission President Jose Barroso, who says that tapping IMF funds is not a "question of prestige", and EU Economic and Monetary Commissioner Olli Rehn, who has said that "it's essential" that Europe takes the charge alone. While it seems that everything about the potential for Greek aid is clouded in uncertainty, it has become clearer that the longer the bickering continues, the longer the weight on the euro will persist. Economic data was relatively light today with Germany's Producer Prices showing a disappointing 0.0% change for the month of February. For next week, look out for Consumer Confidence on Monday and German IFO and PMI for Wednesday.
GBP/USD: POUND CAN'T CATCH A BREAK
The pound can say goodbye to all of its gains in the past couple of days on new dovish comments coming from the Bank of England. Andrew Sentance, a BoE policy maker, said that he finds that there is "some risk of a double-dip recession." His comment immediately sent the pound lower as it somewhat overshadows the drastic improvement in employment data that we saw earlier this week. The fact of the matter is that if the BoE plans to stay pessimistic, the good economic news will have less of an effect at boosting bullish pound morale. Sentance says that the economy is very susceptible to large economic shocks that could easily pull back on the slow recovery that has been underway. Furthermore, he says that the UK will have to take steps toward "substantial" fiscal tightening to offset some of the risks that could plague the nation. Even though Sentance confirms that his theory of a double-dip is not the "central forecast" at the BoE, it still clearly portrays the banks as remaining cautious and firmly satisfied with its dovish policy bias. Today's comments were enough to counter broad euro weakness to send EUR/GBP on its biggest rally since late-February. Today's data schedule was barren of any market moving events, but we have Consumer Prices on tap for next Tuesday and Retail Sales readied for Thursday. The only way we can expect the BoE to start shifting on its policy stance is if next week's CPI confirms the pick-up in inflation we saw last month.
USD/CAD: ANOTHER GOOD DATA DAY
The Loonie made another one year intra-day high against US Dollar before retreating along with other commodity currencies as risk aversion intensified. The Australian and New Zealand Dollars faltered under the weight of dollar strength as well. Canadian economic figures were the center piece of today's action in the Loonie. Canada's core inflation unexpectedly jumped last month to 2.1 percent, prompting the central bank to re-evaluate their stance on record low interest rates. Inflationary pressures may tempt Bank of Canada to raise the interest rates before proposed second half of 2010. Overall consumer price index remained in accelerated territory, printing at 1.6 percent compared to estimates of 1.4 percent. Meanwhile, Canadian Retail Sales exceeding expectations, rising by 0.7 percent in January. Most of the gains were led by homeowners stocking up on supplies as a temporary tax credit on home renovations reaches its end. New Zealand registered lower credit card spending for the second time in three months, suggesting that consumers still remain fearful. The magnitude of the lack in consumer spending will be put on the test next week, when GDP figures are released from New Zealand. Canada expects only Leading Indicators next week, while Australia will focus on their CB Leading Index.
USD/JPY: RISK AVERSION PROMPTS GAINS
The Yen was amongst the biggest gainers today as traders poured into the safety of lower yielding assets. Today, National Strategy Minister Yoshito Sengoku reiterated that the government has "extremely little" room for further stimulus spending. The government obviously intends to leave the ball in the Bank of Japan's court, who is now fully tasked with the job of pulling the country out of deflationary spiral through its quantitative easing program, currently standing at ¥20 Trillion. The state of Japanese economy is obviously still questionable. From one point of view, the threat of double dip recession is slowly fading away as global economy once again found demand for Japanese goods. However looking deeper into the whole situation, we find an economy suffering from deep financial debt and plaguing deflation. Therefore, whether or not the government continues stimulus projects is still a big uncertainty. On the economic front All Industry Activity Index grew more than expected and department store sales fell at a slower rate as sentiment improved and Chinese tourists helped spending. The key for next week will be the inflation figures, which will further elaborate on the state of deflation in Japan.
GBP/USD: Currency in Play for Next 24 Hours
GBP/USD will be the currency in play for the upcoming Monday. Consumer Price Index and Retail Sales Index is due out from U.K. at 9:30GMT or 5:30AM EST. Thereafter, Existing Home Sales, HPI, and Richmond Fed are due from U.S. at 14:00GMT or 10:00AM EST. GBP/USD barely managed to divert from falling into Sell Zone, the pair currently trades within the Range Trading Zone which we determined using the Bollinger Bands. The pair will resume the downtrend if it enters the Sell Zone by breaking below a 1.50 threshold. There is no key support until the low of the year at 1.4780. Conversely, the pair may rebound from current weakness to test the first standard deviation Bollinger Band at 1.5320.
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