US Dollar Remains Mixed on Sluggish Trade, Consumer Confidence, ISM Manufacturing May Disappoint Next Week

The US dollar has spent the past week consolidating within thin ranges, as low volumes did little to spark directional trade. This left the greenback down 1 percent against the euro and up roughly 1.5 percent versus the British pound and Japanese yen by Friday’s close. Meanwhile, the US dollar fell a whopping 3 percent against the Swiss franc, but even that pair remains in consolidation. However, it may only be a matter of time before USD/CHF breaks below key support at the September 22 low of 1.0696 toward 1.0500.

In the coming week, the US markets will be closed on January 1 for New Year’s Day, and low liquidity conditions could persist as scattered financial markets around the globe will also be closed on Wednesday and Thursday. Meanwhile, there will be a bit of event risk on hand, leaving potential open for volatility to pick up a bit. On Tuesday at 9:00 ET, the S&P Case-Shiller Home Price Index for the month of October is anticipated to fall by a record 17.8 percent from a year earlier, highlighting the extent of the collapse in the US housing sector. At 10:00 ET, the Conference Board’s Consumer Confidence Index for the month of December is expected to edge up to 45.5 from 44.9. This would mark the second improvement in a row, but it’s necessary to keep these figures in perspective, as the record low of 38.8 going back to 1967 was just realized in October, down significantly from the index’s average of more than 100 throughout 2006 and 2007. Indeed, the outlook for consumption remains bleak, especially as aggressive discounting by retailers was not able to prevent holiday spending from slumping 4 percent in December from a year earlier (excluding gasoline), according to SpendingPulse. On Wednesday, initial and continuing jobless claims are likely to hold near their highest levels since late-1982, boding ill for the January 9 release of US non-farm payrolls. Finally, on Friday, the Institute for Supply Management’s index of manufacturing conditions during December may fall to the lowest levels since 1982, while the record low of 29.4 reached in May 1980 looming close below.

Euro - US Dollar: Watch Resistance at 1.4125

The euro spent the majority of the past week consolidating versus the US dollar between 1.3915 and 1.4125, and these levels remain the proverbial lines in the sand, as a break above or below the bounds will suggest that price will continue to move in that direction. Given the pair’s slow and steady climb from the December 19 low of 1.3826, my bias is in favor of a EUR/USD rally above 1.4125 toward 1.4300 once volumes pick up again. From an event risk perspective, there’s nothing on the euro’s side of the coin to prevent such a move. The only indicators due to be released include the Purchasing Managers’ Index results for the Euro-zone’s retail and manufacturing sectors, both of which are anticipated to reflect the worst conditions on record. Nevertheless, these do not tend to be very market-moving for the euro, leaving technical analysis as a better method to use this week.

British Pound Likely to Remain a Laggard Versus Euro, US Dollar on Bleak UK Economic, Interest Rate Outlook

The British pound remains exceptionally weak as the currency has held near record lows against the euro and consolidates versus the US dollar above key support at 1.4650. Conditions in the UK remain dismal, as evidenced by the release of disappointing UK GDP revisions earlier in the week, which signaled that the economy actually contracted 0.6 percent during Q3 compared to initial estimates of a 0.5 percent contraction. The GDP figures confirmed 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. Upcoming releases should add to evidence of this as the BOE’s measure of Housing Equity Withdrawals are forecasted to have fallen by a record 3.3 billion pounds during Q3, PMI Manufacturing for the month of December is anticipated to slump to a record low of 33.5, while the BOE’s survey of credit conditions should highlight the extent of the financial crisis in the UK.

As a result, the odds remain in favor of further declines for the British pound, especially against the euro. When focusing on the GBP/USD pair in particular, traders should keep an eye out for a break below near-term support at 1.4650, and perhaps even a push below the December 4 low of 1.4471. However, if price does hold above near-term support, another bounce higher may be in store on the back of broad US dollar weakness.

Japanese Yen Slump Continues as Industrial Production Falls by Record, Amidst Intervention Concerns

The Japanese yen slipped lower throughout the week, and its weakness was only compounded by the release of disappointing Japanese economic data. As Currency Analyst Ilya Spivak noted this morning, the Nomura/JMMA Manufacturing PMI showed sentiment fell to 30.8 in December, the lowest since records began in 2004, while industrial production plummeted by a record 16.2 percent in the year to November. Meanwhile, the Jobless Rate ticked up to 3.9 percent while the ratio of available jobs to seeking applications dropped to the lowest in nearly 5 years. Naturally enough, scarce employment has seen consumers pare back spending, with annualized Household Spending shrinking for the 9th consecutive month and Retail Trade printing at the lowest in over a year. Meanwhile, there are lingering concerns that Japan will attempt to intervene in the currency markets at some point, 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 given the low volumes we’re seeing in the markets due to the holidays.

Terri Belkas is a Currency Strategist at FXCM.