US Dollar Slips But Remains Within Critical Range - Potential for Break Before End of Week

The US dollar ended the day modestly lower against most of the majors, with the exception of the ultra-weak Japanese yen, as the currency consolidates within an ultra-tight range. Indeed, the DXY index has been consolidating within an ascending triangle, and while these are typically bullish continuation patterns, price would first need to break above the 2008 highs as a confirmation of such a bias. However, if price dips below rising trendline support, the outlook for the US dollar could turn decidedly bearish as the currency would likely correct lower versus most of the majors.

In economic news, Durable Goods Orders failed to improve for the sixth straight month as they fell more than expected at a rate of 5.2 percent during January. Transportation led the decline in the overall index, contracting a whopping 13.5 percent, but even excluding this component orders were down 2.5 percent. Furthermore, by looking at the results from a longer-term perspective, conditions appear incredibly bleak as Durable Goods Orders are down 26.4 percent from a year earlier while non-defense capital goods orders excluding aircraft – a gauge of business investment – tumbled 5.4 percent during the month and 20.2 percent from a year ago. All told, the declines suggest that the US economy is suffering at the hands of waning demand on both the consumer and business level. Meanwhile, Initial Jobless Claims rose by 36,000, or 5.7 percent, during the week ending February 21 to a more than 26-year high of 667,000. Even worse, Continuing Jobless Claims increased by 114,000, or 2.3 percent, to 5,112,000, the highest level since recordkeeping began in 1967. The sharp deterioration in the labor markets has only accelerated more in recent months, indicating that the unemployment rate is very likely to reach the Federal Reserve’s expected levels for 2009 sooner rather than later. Furthermore, as long as unemployment levels are climbing, purchases of services, homes, and any other non-essential goods are sure to lag as discretionary income contracts. Indeed, sales of new homes plummeted by 10.2 percent in January to a record low of 309,000, which is in line with the dismal existing home sales results we saw yesterday. A breakdown of the report shows that supply levels rose steadily by 1.1 months to 13.3 months, as a 13.5 percent drop in median prices from a year earlier to $201,100 hasn't helped to spur demand.

Looking ahead to Friday, the 08:30 ET preliminary reading of Q4 GDP for the US is forecasted to be revised even lower after initial estimates showed the index down 3.5 percent. The latest results may show a sharp 5.4 percent contraction, which would still be the worst since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher despite the disappointing fundamental scenario.

Euro Could Fall Under Pressure as Euro-zone CPI May Cause Shift in ECB Rate Expectations

The euro started Thursday on a strong note, but ultimately ended the day little changed due to US dollar price action. Ultimately, EUR/USD remains contained to a fairly well-defined range on a short-term and long-term basis. In the short-term, resistance sits at 1.2800 while support sits at near 1.2690. On a longer-term basis, resistance looms at 1.3000 while support rests at 1.2500. Meanwhile, economic news was mixed, as German unemployment levels rose by 40,000, marking the fourth straight increase, which pushed the unemployment rate up to a 9 month high of 7.9 percent. Meanwhile, GfK consumer confidence for the Euro-zone largest economy rose for the sixth straight month to 2.6 in March, but since this is the initial reading, there is potential for revisions. Looking ahead, Eurostat inflation estimates for the Euro-zone have shown that CPI may have fallen to a 1.1 percent annual pace during January, which would mark the lowest since 1999 but more importantly, remains below the European Central Bank’s 2.0 percent inflation target. If Eurostat confirms this at 5:00 ET, the euro could pull back, especially ahead of the ECB's expected rate cut on March 5. On the other hand, if CPI is higher than anticipated, the currency could gain as the markets will speculate that the central bank may pause in their efforts to make monetary policy more accommodative.

British Pound Bounced From Trendline Support - Make of Break Point for Bears Sits at 1.4150

The British pound bounced from trendline support early on Thursday and subsequently gained throughout much of the day, despite the release of disappointing news. UK Nationwide house prices fell for the sixteenth straight month in February at a rate of 1.8 percent, bringing the annual rate down to -17.6 percent, the lowest since recordkeeping began in 1992. However, the GBP/USD outlook may depend on if the greenback breaks higher or lower. In order to accommodate for this uncertainty, I’ve noted potential ways by which to take advantage of both bullish and bearish GBP/USD scenarios.

Japanese Yen Drops Further as Correction Continues

The Japanese yen continued succumbing to negative fundamental pressures, as the currency loses 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. Data will likely reflect this sentiment overnight as Japanese household spending may have contracted for the eleventh straight month in January, with the annual index forecasted to have dropped 5.5 percent from a year earlier after falling 4.6 percent in December from a year earlier. Furthermore, Japanese industrial output is anticipated to have plummeted a record 30.7 percent in January from a year earlier, and a whopping 10 percent during the month alone. Producers in Japan have faced hard times as the appreciation of the Japanese yen combined with the global economic slowdown has sapped demand for Japanese exports. Overall, the release of these indicators are likely to add to evidence that the recession in Japan's economy is only deepening after Q4 GDP fell by the most since 1974, and may also exacerbate weakness in the Japanese yen.

Terri Belkas is a Currency Strategist at FXCM.