US Dollar the Strongest of the Majors, Continues Consolidation - Nearing a Breaking Point?

The US dollar surged against the major currencies amidst persistent risk aversion and as fundamental releases from other regions made conditions in the US seem relatively solid. However, technical analysis is proving to be increasingly important at this juncture, as the US dollar index is still in the midst of a tight consolidation within an ascending triangle formation, with a break above the 2008 highs likely to signal a continuation of the currency’s uptrend. On the flip side, a drop below Monday’s lows would indicate a reversal of the dollar rally that started in December.

In economic news, the National Association of Realtors (NAR) reported that US existing home sales for January unexpectedly fell 5.3 percent from the month prior down to a record low of 4.49 million. A breakdown of the report shows that median home prices were down 14.8 percent from a year earlier at $170,300 while supply levels edged up to 9.6 months from 9.4 months. Meanwhile, MBA mortgage applications for the week ending February 20 plunged 15.1 percent following a massive 45.7 percent increase the week prior. Though the MBA’s release is highly volatile, it only adds to evidence that the US housing collapse has yet to end. Federal Reserve Chairman Ben Bernanke was also on the wires as he testified in front of the House Financial Services Committee, and while most of the remarks were similar to what we saw yesterday, he did make a concerted effort to say that the government isn’t planning “anything like” nationalization, which he said means “zeroing out shareholders” and causing disruptions in the markets. Though this provided a brief boost to the stock markets, it obviously was not enough to warrant outright optimism as both the DJIA and S&P 500 ended the day down over 1 percent.

Looking ahead to Thursday, signs that domestic demand is showing no sign of recovery should continue to emerge as US durable goods orders are forecasted to have dropped 2.5 percent and even excluding transportation is anticipated to fall 2.2 percent. All told, this would mark the sixth straight month in which the headline reading failed to rise, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The 3-month annualized figure has fallen sharply over the past few months, and combined with the weak outlook for the headline reading, risk aversion could linger and ultimately lead the US dollar higher.

Euro Falls Back to 1.27 as Data Highlights Impact of Global Slowdown on Germany

The euro fell throughout the day on Wednesday, and while the final reading of German GDP for Q4 was unchanged at -1.7 percent, it also showed that a sharp 7.3 percent drop in exports were the primary reason for the nation’s recession. Indeed, though domestic demand (-0.1 percent), private consumption (-0.1 percent), capital investment (-2.7 percent), and construction investment (-1.3 percent) all fell lower during Q4, their declines didn’t even come close to the contraction in foreign demand for German goods. This suggests that the Euro-zone’s largest economy is unlikely to show any signs of recovery until the demand from their major trading partners (France, US, UK, Italy, Netherlands, Austria, Belgium, and Spain) picks up. The euro was also under pressure on news that S&P downgraded Ukraine’s credit rating down to CCC+/C, leaving it seven notches below investment grade and the lowest in Europe. There are concerns about financial stability in Eastern Europe, as banks there face major difficulties financing their operations, which puts their Western European partners at risk as well. Looking ahead to Thursday, the Purchasing Managers' Index (PMI) for the Euro-zone's retail sector is likely to have remained well below 50 - signaling a contraction in activity - during the month of February. This would mark the ninth straight month that PMI remained below 50, and is similar to what we've seen in the manufacturing and services PMI results published by Markit Economics, adding to evidence that the region's recession continues to deepen. The release of retail PMI doesn't tend to be a huge market-mover, but can influence price action for the euro on a very short-term basis.

British Pound the Weakest of the Majors as BOE’s Blanchflower Says UK Recession May Worsen ‘Significantly’

The British pound The headline result of UK GDP for Q4 went unrevised upon the second reading of the index at -1.5 percent. However, the individual components were released and reflected a bleak picture, as private consumption was released at -0.7 percent in Q4 compared to -0.2 percent in Q3, exports slumped down to -5.5 percent from 0.5 percent in Q3, and imports fell to -5.9 percent from -0.5 percent in Q3. Losses in the British pound were only exacerbated by comments from Bank of England (BOE) Monetary Policy Committee (MPC) member David Blanchflower, who was extremely bearish on the UK economy. Blanchflower said that the UK recession may worsen "significantly" and that the downturn has not yet hit a "bottom," which left UK monetary policy "overly restrictive" with the Bank Rate at a record low of 1 percent. He went on to say that the central bank should cut rates to at least 0.5 percent, go neutral and then pursue quantitative easing "quickly," something that the UK Treasury has yet to approve. It is worth noting that Blanchflower is easily the most dovish member of the MPC, but his remarks obviously still hold some weight in the markets.

Japanese Yen Down and Out Despite Signs of Risk Aversion

The Japanese yen has finally started to succumb to negative fundamental pressures, as the currency has continued to lose its correlation with the stock markets. This has left many wondering if the Japanese yen has lost its safe haven status, as Japan faces a deepening recession amidst dismal domestic demand and plunging foreign demand, as exports fell a record 45.7 percent in January from a year earlier. However, the decline in the currency will serve as good news for Japanese officials since the yen’s prior appreciation was one of the big reasons why exports contracted so sharply, along with the global economic slowdown.

Terri Belkas is a Currency Strategist at FXCM.