US Dollar: Will Consumer Confidence Disappoint on Tuesday?

The US dollar ended the day up slightly against the euro and British pound, reversing sharp declines during the Asian and European trading session. However, the greenback ultimately ended the day down versus the Swiss franc, Japanese yen, and commodity dollars. Fundamentally, there was no news to speak of, but event risk will pick up on Tuesday, leaving potential for volatility to pick up a bit. 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.

Euro Trades in 300 Point Range vs. US Dollar as Liquidity Returns, Swiss Franc Gains as Safe Haven of Choice

The euro spent the majority of last week consolidating versus the US dollar between 1.3915 and 1.4125, but the pair’s break higher on Sunday coincided with a surge in volatility. Indeed, EUR/USD traded within a more than 300 point range after rallying to 1.4365 and reversing to break below 1.40 at the end of the day. On the other hand, the Swiss franc gained across the majors on safe-haven flows amidst escalating conflicts in the Middle East. The euro and Swissie did have one thing in common today: they both reached fresh record highs against the British pound. While retracements may be due for EUR/GBP and GBP/CHF on Tuesday, the trend remains clear for the pairs. There will be little in the way of event risk for the euro and Swiss franc through the end of the week. Tomorrow, the Purchasing Managers’ Index results for the Euro-zone’s retail sector are anticipated to reflect the worst conditions on record while the UBS Swiss Consumption Indicator could slump to a three-year low. Nevertheless, netiher of these releases tend to be market-moving, making technical analysis far more useful this week.

British Pound Reaches New Record Low Against Euro on Bleak UK Economic, Interest Rate Outlook

The British pound remains exceptionally weak as the currency reach new record lows against the euro and tested the May 2002 low of 1.4460 versus the US dollar. Conditions in the UK remain dismal, as evidenced by the release of disappointing UK GDP revisions last 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. In a similar vein, the Bank of England’s measure of housing equity withdrawals fell for the second straight quarter during Q3 by 5.7 billion pounds, adding to indications that credit is not readily available nor wanted, which leaves consumption growth likely to fade further. The BOE 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.

Japanese Yen Ends Monday Mixed, GBP/JPY Hits Fresh 13-Year Lows

The Japanese yen ended Monday mixed across the majors, as the currency fell versus the Swiss franc but gained against the euro, British pound, and US dollar. These moves were less the result of Japanese yen price action and instead were dependant on euro and British pound flows. Nevertheless, with GBP/JPY trading near 13-year lows, the resumption of a the yen’s bull trend may add to lingering concerns that Japan will attempt to intervene in the currency markets at some point. If there is a good time for the country to step in to physically drive the currency down, this may be it given the lower volumes we’re seeing in the markets due to the holidays, but if the Japanese yen continues to ease back against most of the major currencies, such action may be unnecessary.

Terri Belkas is a Currency Strategist at FXCM.