US Dollar Holds on to Latest Gains Despite Dismal US Housing Data, What to Expect Through the End of the Week

The US dollar has done little but consolidate its gains from December 18 and 19 since the start of the week, and this is likely to remain the case through Friday as trading volumes are bound to remain low. This has been the case for the stock markets as well, as the Dow Jones Industrial Average has barely budged from a channel formation with a current range of approximately 8,370 - 9,000. All of this subdued price action came despite a series of releases that may have been market-moving under different circumstances. First, US Q3 GDP was confirmed at -0.5 percent, but the surprising factors were downward revisions to consumer spending and core PCE, as the changes suggest that the biggest driver of growth and inflation pressures slowed more than previously anticipated, supporting the Federal Reserve’s aggressive monetary policy actions announced on December 16. Meanwhile, US existing and new home sales both fell more than anticipated during the month of November, with the former down 8.6 percent to record low of 4.49M while the latter tumbled 2.9 percent to a 17-year low of 407K.

In a similar vein, economic releases due out at 8:30 ET on December 24 are likely to be broadly disappointing and add to indications that the US recession only worsened during Q4. Indeed, personal spending in the US is forecasted to have fallen negative for the fifth straight month in November at a rate of -0.7 percent, while durable goods orders are expected to have dropped 3.0 percent, marking the fourth straight month that demand has either stagnated or declined. Typically, the US dollar would pull back on figures that were weaker-than-expected, but this may not necessarily be the case since trading should remain quiet ahead of, during, and just after the December 25 holiday.

Euro Holds Near Record Highs Versus British Pound, Both Remain Under Pressure Against US Dollar

The euro continues to trade near record highs versus the British pound, as the pair has done little but consolidate below 0.9500 - 0.9550. On the flip side, the individual currencies have gone relatively unchanged versus the US dollar, leaving EUR/USD to consolidate below 1.40 while GBP/USD has traded in a range of approximately 1.4700 - 1.4850. The moves came following the release of disappointing UK GDP revisions, as the economy actually contracted 0.6 percent during Q3 compared to initial estimates of a 0.5 percent contraction. The GDP figures confirm that the UK fell into recession for the first time since 1990-1991 as a result of the sharpest drop in consumer spending since 1995 and a decline in investment as the financial crisis took its toll. The Bank of England has already cut rates to 2.00 percent, the lowest since 1951, but this data only adds to speculation that they will reduce the Bank Rate by another 50bps in January. As a result, the odds remain in favor of further declines for the British pound, especially against the euro.

Japanese Yen Pulls Back Across the Majors as Volatility Cools, Industrial Production Expected to Fall by Record

The Japanese yen slipped lower against the US dollar and euro on Tuesday, but fell the most against the Canadian dollar and Swiss franc, which were actually some of the strongest currencies in the forex markets. Given the lower volumes associated with holiday trading, as well as a significant drop in financial market volatility as indicated by declines in the CBOE’s VIX volatility index over the past month or so, much of the fuel behind the Japanese yen’s past gains have been eliminated. This is surely comforting to the Bank of Japan, as the appreciation of the currency has been extremely detrimental for the Japanese economy. However, this does not mean that Japan will not attempt to intervene in the currency markets, as the yen remains historically high. Indeed, if there is a good time for the country to step in to physically drive the currency down, this may be it.

Looking ahead, the Japanese economy fell into recession during Q2 and Q3 of 2008, and upcoming data is likely to indicate that it extended into Q4 as well. Industrial production for the month of November is forecasted to fall by 6.8 percent, bringing the annual measure down to a record low of -15.0 percent. Manufacturers are feeling the impact of a slowing in domestic demand, as well as foreign demand, which has only been exacerbated by the rapid appreciation of the Japanese yen. Individual economic releases don’t tend to have a huge impact on the Japanese yen, but this is still an indicator that may be worth watching.

Terri Belkas is a Currency Strategist at FXCM.