US Dollar Holds To Wide Ranges, ISM Services Forecasted to Hit Record Low on Wednesday

The US dollar remains within the range it has held to since the start of November, and for what it’s worth, day-to-day moves signal little more than consolidation. While it is possible that we will see a sharp correction lower in the near-term, the long-term trend remains very much in favor of US dollar strength. Though Federal Reserve Chairman Ben Bernanke has indicated that the FOMC is likely to cut rates further, the fed funds rate is already at a historic low of 1.00 percent which leaves little in the way of maneuverability when it comes to monetary policy going forward. As a result, the option of quantitative easing - where the Fed buys long-term Treasuries to push rates down - has been presented as a more feasible option, and this will certainly be a development worth watching in coming weeks and months.

Looking ahead to Wednesday, conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have worsened in November as the Institute for Supply Management index is estimated to fall to new record low of 42.0 from 44.4. Indeed, consumer confidence remains exceptionally weak, and the National Bureau of Economic Research (NBER) has already announced that the US economy has been in recession since December 2007. A disappointing result could weigh on the US dollar, but traders should also keep an eye on the employment component as a gauge for Friday's US non-farm payroll (NFP) report.

Euro Edges Higher, Euro-zone Retail Sales Likely to Disappoint

The euro continues to form a series of higher lows, suggesting EUR/USD could be forming some sort of intermediate bottom. Nevertheless, intraday rising trendline support near 1.25 is a more significant level that will be worth watching, as a break below may be followed by a test of the October lows of 1.2328. Looking ahead, Euro-zone retail sales are expected to have fallen 0.4 percent during October, leaving the annual rate at a disappointing -1.5 percent. However, given the 1.6 percent plunge in spending in Europe's largest economy, Germany, there is potential downside risk for Wednesday's report. The Euro-zone has already fallen into recession, as indicated by the 0.2 percent contraction in GDP during Q2 and Q3, and continued declines in consumption would only suggest that GDP will fall negative in Q4 as well. As a result, a weaker-than-expected retail sales reading should weigh on the euro, especially since the results will add to speculation that the European Central Bank will cut rates aggressively on Thursday.

British Pound Remains Under Pressure Ahead of BOE Rate Cut as UK Construction PMI Falls to Record Low

The British pound initially eased back on the release of UK construction activity figures, but subsequently bounced back amidst broad US dollar weakness. Focusing on the data on hand, construction PMI plummeted to 31.8 in November from 35.1, signaling the worst contraction in business activity since record-keeping began in 1997. Weakening employment conditions combined with tight credit markets have sapped demand for housing, adding to downside risks for the economy at large. Upcoming UK services PMI results are likely to reiterate this, as the index is forecasted to fall to a record low of 41.2 in November from 42.4. Disappointing readings should also add to speculation that the Bank of England will slash interest rates on Thursday, as Bloomberg News predicts a 100bp reduction to 2.00 percent. Support for GBP/USD looms below at 1.4805, and as long as price holds above that point, there is potential for a retracement higher. However, the trend and interest rate expectations remain overwhelmingly in favor of long-term GBP/USD declines.

Australian, New Zealand Dollars Hold Up Despite RBA Rate Cut, Japanese Yen Slips as Dow Gains 3.3%

The Australian dollar and New Zealand dollar both managed to edge higher on Tuesday despite the Reserve Bank of Australia’s 100bp rate cut on Monday evening to 4.25 percent. While AUD/USD did initially spike lower, indications that the RBA would take a more neutral stance in coming months allowed the currency to recover. Meanwhile, the Japanese yen edged lower on a slight pick up in risk appetite, as evidenced by the 3.3 percent gain the Dow Jones Industrial Average and nearly 4 percent rise in the S&P 500. Indeed, there is still a relatively tight inverse correlation between the yen and US equity indexes. During the next 24 hours, GDP results due to be released at 19:30 ET tonight are expected to show that growth in Australia slowed further during Q3 to a 0.2 percent pace, down from 0.3 percent in Q2. While the economy has been relatively resilient compared to countries like the US and the UK, the Reserve Bank of Australia has already said that they expect growth to cool further and bring down inflation pressures, which is why the bank slashed interest rates. Meanwhile, the Reserve Bank of New Zealand has cut rates during their past three meetings, each more aggressive than the last, and the same is expected for the RBNZ’s next rate announcement on Wednesday at 15:00 ET. Indeed, a Bloomberg News poll shows that economists anticipate that the central bank will slash rates by a whopping 150 basis points to a 5-year low of 5.00 percent. Following the bank’s last rate decision, RBNZ Governor Alan Bollard suggested that future rate cuts would depend on data confirmation of easing inflation pressures and “how the global financial developments play out.” Thus far, economic data in New Zealand has signaled cooling price growth, as the RBNZ’s 2-year inflation expectation survey fell to 2.7 percent from 3.0 percent in Q4 and food prices fell negative for the first time in 14-months during October. Meanwhile, financial market conditions have only deteriorated, leaving the odds in favor of a sharp rate cut by the RBNZ that could trigger declines in the New Zealand dollar on Wednesday. Traders should beware though that if the RBNZ's policy statement suggests they may leave rates steady during their next meeting, the Kiwi could actually gain.

Terri Belkas is a Currency Strategist at FXCM.