US Dollar Loses Ground - Will We See A Break Lower on Thursday?

The US dollar continued its December slump against the euro, British pound, and Swiss franc on Wednesday but gained versus the New Zealand dollar and Australian dollar, as the commodity currencies ran into formidable resistance. For what it’s worth, the greenback continues to consolidate below its November highs, making it difficult to call for any sort of directional moves. This is similar to what we’ve seen in the US stock markets, as the Dow Jones Industrial Average and S&P 500 have climbed from their November lows, but have failed to break above key resistance levels. News that headway was being made on a bill to allow a $15 billion bailout loan to be made to GM, Chrysler, and Ford did little for the markets, as such legislation faces heavy opposition and may not even pass a Congressional vote. That said, event risk will pick up a bit on Thursday as the US import price index is anticipated to have contracted a record 4.9 percent during the month of November, bringing the annual rate down to a more than six year low of -2.0 percent. Such a change would be the result of plunging commodity prices and the stronger US dollar, and will add to evidence that inflation pressures are falling rapidly. Furthermore, the news could add to speculation that the Federal Reserve will cut rates when they meet on December 16, as fed fund futures are already pricing in a 75 basis point cut to 0.25 percent. As a result, there is potential for the US dollar to weaken on Thursday, and perhaps even break out of its recent trading ranges.

British Pound Faces Heavy Resistance at 1.49, BOE’s Biggest Dove to Step Down in May 2009

The British pound was not able to make much headway on Wednesday despite broad US dollar weakness as major trendline resistance looms above at 1.49. Indeed, this level represents a “line in the sand” for GBP/USD, as the trendline has held price within a downtrend since late September and a break above it would signal that a strong bullish retracement may be in store. Until then, the prospects for Cable look bearish given the dour economic scenario in the UK. According to a report from the UK’s Guardian indicated said that the Bank of England (BOE) may consider undertaking quantitative easing, in which they would buy long-term government bonds in order to force interest rates lower. This is similar to something that Federal Reserve Chairman Ben Bernanke suggested early last week. In other BOE-related news, BOE Monetary Policy Committee member David Blanchflower, who is by far the most dovish voter in the committee, will step down when his term ends in May 2009. This may have been market-moving news a year ago when the UK’s interest rate outlook was a bit mixed, but now that UK rates have already plunged to 2.00 percent and further cuts could be on the way in coming months, Mr. Blanchflower’s departure will do little to change the dovish bias within the MPC.

Euro Hits Fresh Record High Versus British Pound, Swiss Franc Climbs Ahead of SNB Rate Decision

The euro climbed to a fresh record high versus the British pound on Wednesday, helping to bring the EUR/USD pair up for a test of the November 5 and November 25 highs near 1.3070. The moves came despite the fact European data remains broadly disappointing and signal potential for further rate cuts by the European Central Bank in coming months. The Swiss franc was similarly strong against the greenback, as USD/CHF continues its consolidation between support at 1.1925 and resistance at the November 21 highs of 1.2296. However, the Swissie’s next move may be determined by an upcoming rate decision. Of the 18 economists polled by Bloomberg News, 15 believe that the Swiss National Bank (SNB) will cut rates by 50 basis points to 0.50 percent. On the other hand, 1 is betting on a 25 basis point reduction, while 4 forecast no change. Over the past two months, the SNB has been exceptionally aggressive when it comes to monetary policy, as they participated in the October 8 coordinated rate cuts (-50 basis points to 2.50 percent), and surprisingly slashed rates during unscheduled meetings on November 6 (-50 basis points to 2.00 percent) and November 20 (-100 basis points to 1.00 percent). According to a SNB press release from November 20, the central bank forecasted that inflation could fall below their 2 percent target before the end of the year and sees more pronounced risks for a "marked slowdown" in the Swiss economy next year in light of the worsening in international economic conditions. The Swiss franc has been one of the few currencies to respond to central bank rate decisions, compared to the euro and British pound, which are both trading higher even though the European Central Bank and Bank of England cut rates aggressively last Thursday. As a result, if the SNB does indeed cut rates in line with expectations, the Swiss franc could pull back. On the other hand, if the SNB leaves rates unchanged at 1.00 percent, the USD/CHF could break below support to target 1.1830.

Australian Dollar, New Zealand Dollar Down Despite 4% Gain in Oil, Gold

The Australian dollar and New Zealand dollar both backed down from trendline resistance on Wednesday, similar to the British pound, despite the fact commodity prices, such as gold and oil, were broadly higher. Whether price holds below or breaks above these key levels will determine the outlook for pairs like AUD/USD and NZD/USD in coming weeks. More specifically, AUD/USD resistance looms at 0.6650 and NZD/USD resistance sits at 0.5500. Looking ahead to the next 24 hours, the November reading of the unemployment rate in Australia is forecasted to pick up to 4.4 percent from 4.3 percent, and while this is still a historically low number, the change is likely to suggest that labor market conditions will continue to weaken. In fact, the Australian economy is forecasted to have lost 15,000 jobs during November, which would mark the third drop this year. Mounting job losses may only exacerbate the slowdown in the nation, as consumers will have less incentive to spend and drive domestic demand. Overall, the Australian dollar faces downside risks from this employment report, especially if the net employment change drops more than expected. However, if the figures actually reflect even a slight increase in hiring or a stable unemployment rate, the Australian dollar could gain.

Terri Belkas is a Currency Strategist at FXCM.