US Dollar: Markets Ignore Fed Warnings
The US dollar remained almost exactly unchanged against major forex counterparts, as dismal Housing Starts data and noteworthy Fed speeches had little effect through uneventful currency trading. US Building Permits fell to their lowest in 14 years through the month of November, as a clear oversupply of housing inventories limited fresh demand for new homes. It is subsequently unsurprising to note that Housing Starts fell just above similar 14-year depths, and there seems to be little in the way of further declines. Rising borrowing costs will continue to limit demand for an already-downtrodden housing sector, and such trends are unlikely to reverse through the medium term. Yet traders showed limited reactions to the fresh real estate data; both Building Permits and Housing Starts were actually marginally above pessimistic median forecasts. Market attention subsequently shifted to an interview by Richard Fisher, president of the Federal Reserve Bank of Dallas, who commented on monetary policy developments and overall outlook for the US economy. Fisher said, “The actions [Fed officials] have taken should provide some buoyancy through the course of next year to the economy. But I want to make sure that we don’t overreact and create further problems down the road.” In effect, the regional Fed president said that FOMC interest rate cuts to date should be enough to bolster growth through 2008 and implied that further cuts may be imprudent given current inflationary prospects. Such hawkish commentary subsequently leaves questions as to whether the FOMC will continue to cut interest rates according to market forecasts. Fisher will be a voter on the Federal Open Market Committee through 2008, and one can be fairly certain that he is not alone in worrying about domestic price pressures. Yet Fed Funds futures remained almost exactly unchanged through the release, and the dollar remained similarly unmoved despite the noteworthy rhetoric. Currency markets may remain similarly quiet in the days ahead; limited US and international event risk leaves little motivation to force major moves across key forex pairs.

Record Trade Surplus has Little Effect on Euro Trading
The euro remained almost exactly unchanged against the dollar for the second consecutive trading day, and we are likely to continue to see lackluster price movements in the days ahead. European economic event risk was limited to Euro Zone Trade Balance figures, with a significantly above-forecast result doing little to shift sentiment for the single currency. Indeed, the strong figure follows just eight days after a record-high result for German Trade Balance through the same month of October. Yet some noted that a specific shift in trade by country may become a hot-topic among European politicians in the months ahead, as China has become the largest single foreign supplier to the euro area. Given existing tensions over China’s currency, increasingly populist European politicians may exert greater pressure on People’s Bank of China to freely float the CNY. Of course, the short-term effects of such rhetoric may do little to shift the euro’s stance against the US dollar and other major counterparts. Markets will next look to tomorrow’s German Producer Price Index data to drive euro volatility.

British Pound: Stagnant Inflation Threatens Further BoE Rate Cuts
The pinnacle for UK event risk this week was seen in this morning’s consumer inflation data. The sterling’s long-term bull run was put into jeopardy two weeks ago when the Monetary Policy Committee lowered the overnight lending rate by a quarter of a percent to 5.50 percent. However, major support in GBP/USD has held up under expectations that the BoE’s cut was a one off and the Fed’s policy bias was firmly set for further easing in the months ahead. Such speculation was supported last week by the output component of the PPI reading for November which accelerated to its fastest annual pace of growth in 16 years. This pass through in upstream price pressures clearly did not materialize in the consumer price index numbers though. According to the ONS data, headline inflation pressures actually held steady at 2.1 percent over the year through November. At the same time, the core gauge cooled to 1.4 percent clip to match the weakest reading in 14 months. Looking ahead to tomorrow, pound-centric risk will revolve around the BoE’s minutes from the December 6th rate decision.

Yen Advances as Risk Appetite, Fed, BoJ Rate Decision Approaches
Equity markets were recovering from yesterday’s global selloff, but the mild rebound wasn’t feeding into the yen bid through Tuesday. Instead, broad risk trends were on the rise thanks to a round of infusions by a number of central banks. The Fed’s first TAF infusion of $20 billion and the BoE’s auction of a similar amount would pale in comparison to the ECB’s record-breaking $500 billion injection into the banking system. As for scheduled event risk, there were only a few lower rung sales indicators and the Cabinet Office’s economic report. Nationwide department store sales for November rose 0.9 percent, while Tokyo sales jumped 1.7 percent. For December the government left its overall economic assessment unchanged, though it did downgrade corporate profits and business conditions forecasts.

Canadian, Australian and New Zealand Dollars Halt Declines at Significant Support
Commodity interest was providing little help to the FX comm bloc today; though there was significant event risk on each of the Australian, New Zealand and Canadian calendars to keep fundamental interests roused. The RBA released its policy minutes for the December 4 meeting; and according to the statement a follow up rate hike was halted by the credit market slump which had already raised the costs of lending. For New Zealand, the NBNZ business confidence report for December slipped for the second month, though tomorrow’s third quarter current account balance will present more hearty data to work with. Finally, Canadian inflation offered little support in keeping follow rate cuts from the BoC in 2008. Though headline inflation ticked higher thanks to gas prices, core inflation cooled to a 19-month low.

Kathy Lien is the Chief Currency Strategist at FXCM.