US Dollar Down as Consumer Confidence Nears 28-Year Lows

After a conspicuously choppy session, the US dollar would finish the week with a modest buffer from major breakout levels (the exception being USDJPY). The University of Michigan's consumer confidence index fell more than expected in February to 56.2 from 61.2, nearing the 28-year lows, as expectations for the future of the economy remain dour. However, the component of the index gauging sentiment on current conditions rose to 67.1 from 66.5, suggesting that aggressive discounting by retailers and hopes for a successful fiscal stimulus plan are having a temporary impact. Indeed, as we saw on Thursday, US retail sales surprisingly rose 1 percent in January, but with the index still down 9 percent from a year earlier and job losses climbing, the increase marks little more than a blip on the radar. In the very near-term, the US dollar

Looking ahead to next week, the February 18 release of minutes from the January Federal Open Market Committee (FOMC) meeting, when they left the fed funds target range at 0.0 percent - 0.25 percent, are likely add to indications that they will leave the target unchanged throughout much of 2009. In fact, the FOMC said in their post-meeting statement that their focus had shifted to “support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” The minutes may have an impact on risk trends if the Committee’s outlook proves to be more bearish than currently perceived. However, if the news happens to be positive for the stock markets, it may also be negative for the greenback, which has been trading solely as a safe-haven asset lately. On February 20 at 8:30 ET, the release of the January reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months. Indeed, CPI is forecasted to have edged a slight 0.1 percent higher during January, while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent.

Euro Ends Day Lower as Euro-zone GDP Falls by Most Since at Least 1995

The advanced reading of Q4 GDP for the Euro-zone showed that growth in the economy contraction for the third consecutive quarter and by the most since record keeping began in 1995 at a rate of -1.5 percent. Likewise, the annual measure fell negative for the first time ever at a rate of -1.2 percent. While European Central Bank President Jean-Claude Trichet essentially wrote off the possibility of cutting rates to zero in comments following the bank’s February meeting, noting that such a level was "not appropriate" as there are a number of drawbacks, the GDP news only raises the odds that the ECB will cut rates during their next meeting on March 5. Indeed, Mr. Trichet refused to say the ECB would not reduce rates further, while a variety of ECB members have said that further cuts were “very probable.” Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that the latest 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.

British Pound Down Ahead of UK CPI, BOE Minutes Next Week

Looking ahead to next week, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England’s target range of 1 percent - 3 percent. However, with the BOE expecting that CPI could fall “well below” 2 percent in the first half of the year, such a decline may only be the first in a series. Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back. Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

Japanese Yen: Watch for Reactions to G7 Statements, Dismal Japanese GDP Results

The Japanese yen outlook remains contingent upon risk trends, and keeping this in mind, traders should watch out for the forex market’s reaction to both the G7 statement, Japanese GDP results, and word on final votes on the US fiscal stimulus place. The G7 statement has potential to include hawkish comments on currencies like the Japanese yen, which could help drive it lower on speculation that the government will physically intervene, but it is worth noting that previous G7 meetings have yielded little in the way of market-moving news.

Meanwhile, on Sunday at 18:50 ET, Japan's Cabinet Office will release preliminary growth readings, and after two consecutive quarters of contraction in Q2 and Q3, the outlook doesn't look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has been climbing slowly, and perhaps even worse, pre-tax earnings growth has actually fallen negative compared to a year earlier, according to the latest figures. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 23.1 percent in Q4 2008, according to preliminary figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 3.1 percent in Q4, with the annualized rate forecasted to plummet by the most since 1974 at a rate of 11.7 percent. This could hurt risk appetite during the Asian trading session, lead the Nikkei lower, and thus push the Japanese yen higher amidst deleveraging.

Finally, there’s the status of the US fiscal stimulus plan. At the time of writing, the plan seemed likely to pass final votes by the House and Senate by either the end of Friday or the weekend, which would allow President Obama to sign the bill into law on Monday. To a certain degree, the passage of the bill may be priced into the markets, but if for some reason one of the bodies of Congress votes the bill down, the news could hurt investor confidence significantly.

Terri Belkas is a Currency Strategist at FXCM.