US Dollar, Japanese Yen End Mixed as House and Senate Agree on Fiscal Stimulus, Ahead of US Retail Sales

The US dollar and Japanese yen ended the day mixed versus the majors as equities traded within narrow ranges, signaling indecision in the markets. Nevertheless, both the DJIA and S&P 500 finished the day mildly higher, suggesting risk appetite may be able to pick up in the near-term. Perhaps the biggest question mark in regards to investor sentiment, though, is what happens with the US fiscal stimulus bill. The House and the Senate have come to agreement on respective difference in the bill, bringing the total cost down to $789.5 billion over two years from $930 billion last week. A final vote could come before the end of the week, and has potential to provide a big boost to risky assets and subsequently weigh on the US dollar and Japanese yen.

Meanwhile, Federal Reserve Governor Elizabeth Duke's speech this morning focused on the housing crisis and cited methods by which to address the problem. Duke noted that foreclosures extend beyond home owned by individuals who reside there, as "one in five foreclosures appears to be affecting renter-occupied units," suggesting that foreclosures are becoming increasingly difficult to prepare for and manage. As a result, there is a great need to tackle foreclosures before they start, including modifying more loans of distressed borrowers. Duke cited a need to act soon, because lingering uncertainty on the "scope and terms of the additional steps that likely will be offered" tends to result in hold-outs by borrowers, lenders, and servicers "in hope of securing a better deal." This leaves potential open for benefits of foreclosure prevention efforts to be outweighed by the "cost of delay." A comprehensive plan may not be introduced until next month, as Treasury Secretary Tim Geithner said yesterday that President Obama's economic team will be formulating and announcing one "within the next few weeks."

Looking ahead to Thursday, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh straight month in January, as even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. More specifically, advance retail sales are anticipated to have contracted 0.8 percent during the month, and excluding auto sales are expected to have slumped 0.4 percent, initiating what may end up being a consistent trend through the first half of 2009 as well. As we saw with US non-farm payrolls, the impact of a disappointing result may be limited, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further

British Pound Drops as BOE’s King Signals Further Rate Cuts, UK Jobless Claims Hit Nearly 10-Year High

The British pound tumbled on Wednesday as UK jobless claims rose for the twelfth straight month in January to a nearly 10-year high of 1.23 million, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time. Even worse, Bank of England Governor Mervyn King said that the UK economy was in for a “deep recession” during opening remarks for his inflation report press conference regarding the UK economy. King was highly dovish, saying that "further easing in monetary policy may well be required.” Indeed, forecasts in the BOE’s Quarterly Inflation Report were based on market expectations for a drop in the Bank Rate to 0.75 percent by mid-year, with GDP projections showing growth remaining negative throughout 2009 followed by a rebound in 2010, while CPI is anticipated to fall well below the BOE's 2 percent target in the first half of 2009, though the outlook beyond that appears uncertain. However, the BOE’s dour outlook has led expectations to shift for the Monetary Policy Committee’s next rate decision on March 5, as some anticipate that they could slash rates to zero and signal a move to quantitative easing. There are no economic indicators for the UK due to be released through the end of the week, but traders should see continued volatility in GBP/USD, especially since the pair has been trading in line with risky assets like equities.

Euro Continues Consolidation Despite ECB Comments Noting ‘Very Probable’ Rate Cut in March

There was little in the way of key economic data released form the Euro-zone, but comments from multiple European Central Bank members indicating that they will likely cut rates on March 5 helped to weigh on the euro. Indeed, ECB Governing Council member Miguel Angel Fernandez Ordonez said that it was "very probable" that they would reduce rates next month, and these sentiments were echoed by Executive Board member Jose Manuel Gonzalez Paramo and Governing Council member Guy Quaden. Following these statements, Credit Suisse overnight index swaps shifted closer to pricing in a 50 basis point cut to 1.50 percent. Looking ahead to Thursday, the ECB’s Monthly Bulletin can be market-moving in that it provides deeper insight into what the central bank’s monetary policy committee is looking at from an economic and financial market perspective. However, ECB President Jean-Claude Trichet has already stated that they would be issuing new forecasts for growth and inflation in March, suggesting there won’t be much news of importance coming from this report. Nevertheless, traders should keep this report in mind if they are holding euro positions on Thursday morning, as any portions of the report that impact interest rate expectations should shake up the currency. Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that Tuesday’s price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

Australian Dollar Could Slip Overnight as Unemployment Rate May Hit 2+ Year High

The Australian dollar faces bearish potential overnight, as data may show that the labor market deterioration that started during the second half of 2008 will extend through 2009. Indeed, the January unemployment rate is forecasted to rise to a more than two-year high of 4.7 percent from 4.5 percent, while the net employment change is anticipated to fall for the third straight month by 18,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 19:30 EDT.

Terri Belkas is a Currency Strategist at FXCM.