US Dollar, Japanese Yen Pull Back from Key Resistance as Volatility Cools

The US dollar and Japanese yen both slipped against their major counterparts on Monday, and as usual, the moves had more to do with risk trends rather than any major fundamentals factors. In fact, the US economic data released at 10:00 ET was broadly better-than-expected. First, the National Association of Realtors (NAR) reported that existing home sales jumped 6.5 percent in December to 4.74 million from 4.45 million as median prices tumbled 15.3 percent from a year earlier to $175,400. According to bankrate.com, rates on 30-year fixed mortgages fell throughout November and December, and combined with lower home values, the combination may be helping to plant the seeds of stabilization in the housing sector. Nevertheless, it will take far more evidence than one month of improvement to call this any sort of bottom, and if anything, with employment conditions remaining bleak, risks remain to the downside for the sector as a whole. Meanwhile, the Conference Board’s US leading indicator index for the month of December unexpectedly rose 0.3 percent to 99.5. This was the first improvement in 6 months, but looking at a breakdown of the report, it is clear that the rise in the index doesn’t necessarily warrant cheer. The primary reason for the gain was a 0.99 percent rise in M2 money supply, which is a result of the Federal Reserve’s efforts to boost liquidity. Meanwhile, the components measuring the average workweek, jobless claims, pace of deliveries, building permits, and stock prices all weighed on the overall index. While the Fed’s actions have yielded slightly better credit conditions, they haven’t done much for growth, suggesting that the Conference Board’s measure does not give a very realistic view of prospects for the US economy.

Looking ahead to Tuesday, the Conference Board’s consumer confidence index for the month of January is forecasted to edge up to a reading of 39.0 from 38.0. While a bigger-than-expected increase could spark a bit of optimism in the markets, it is necessary to keep in mind that last month's figure represents the lowest since record keeping began in 1967. When trading this sort of news in the forex markets, traders should watch the impact on risk trends, as building investor confidence could actually lead the "safe haven" US dollar lower even though the figures are positive from a fundamental perspective.

Euro Breaks Higher - More Gains to Come?

EUR/USD broke out of its falling wedge formation on Monday morning, leaving a considerable amount of bullish potential open for the currency pair. This was much of the reason why I chose “long EUR/USD” as my analyst pick of the week, and assuming risk appetite continues to pick up, the trade should work out well in the near-term. There will be a bit of event risk on hand for the currency on Tuesday morning though, as the IFO index of German business confidence is forecasted to show broad declines in sentiment on the business climate (from 82.6 to a record low of 81.0) and current economic conditions (from 88.8 to a 6-year low of 85.0). However, the outlook component is actually anticipated to rise slightly from a record low of 76.8 to 77.5, which is in line with the latest ZEW results. Indeed, while the German economy is in the midst of recession and the financial markets remain relatively unstable, four rate cuts by the European Central Bank since October and the announcement of a 50 billion euro stimulus plan by German Chancellor Angela Merkel has helped to boost sentiment on the future a bit. This figure can be market-moving on a very short-term basis, so traders should watch for volatility in the euro around the 4:00 ET release time.

British Pound Rebounds as UK Mortgage Approvals Rise, Barclays News

The British pound rallied toward 1.40 on Monday amidst a broad improvement in risk appetite and mixed news from the UK. The announcement from Barclays that the firm would report full-year profits “well ahead” of expectations on February 9 helped to lift equities in Europe, which translated into gains for US shares and risky assets in general. Meanwhile, according to the British Bankers’ Association (BBA), outstanding loans to non-financial businesses fell for the second month in a row by 2.9 billion pounds to 345 billion pounds in December, suggesting that the credit crunch is having a large impact on the ability of businesses to expand and invest. On the other hand, the number of mortgage applications approved rose to 22,051 in December from 17,339, signaling an increase in consumer loan issuance. However, we’ve seen gains like this in the past, so the move does little to instill confidence that the UK housing market will bottom in the near-term.

Australian Dollar: PPI Release to Set the Stage for Market-Moving CPI Release on Tuesday Night

The Australian dollar climbed against the US dollar and the Japanese yen, thanks to a shimmer of investor confidence that also lifted equities and other forex carry trades higher. There will be one release from Australia overnight, and while the Australian Producer Price Index (PPI) isn't necessarily the biggest market-mover for the Australian dollar, but it will be useful as a gauge for the 01/27 release of the Consumer Price Index (CPI), which does tend to spark significant volatility. PPI is forecasted to have slowed from a record pace of 2.0 percent in Q3 down to 0.4 percent pace during Q4. This should help to weigh the annual rate of growth down to 5.2 percent from 5.6 percent, and if the indices fall more than anticipated, the Australian dollar could slip as the market will shift to price in a soft CPI reading the next day. On the other hand, if PPI reflects resilient price pressures, the currency could gain.

Terri Belkas is a Currency Strategist at FXCM.