US Dollar, Japanese Yen Gain Amidst Broad Consolidations - US Durable Goods Orders May Fall for 7th Straight Month

The US dollar generally ended Tuesday higher while the Japanese yen made some headway against the highest yielding currencies amidst broad declines in risky assets. Indeed, after the DJIA surged nearly 500 points on Monday, the index subsequently backed off to end the day down by 115 points. This likely represents more of a consolidation than a turn in investor sentiment, but the moves nevertheless worked to the benefit of the safe-haven currencies even though Tuesday's US data was surprisingly strong. First, the Federal Housing Finance Agency reported that prices for homes purchased in January rose 1.7 percent, the first increase in eleven months. The index had been anticipated to fall 0.9 percent, and the increase adds to evidence that the seeds for recovery in the housing sector may have been planted. However, given the deteriorating labor market situation, a true rebound may not be possible until the US recession ends. Meanwhile, the Richmond Federal Reserve's index of manufacturing business activity jumped to a 6-month high of -20 in March, a significant improvement from the reading of -51 we saw in February. A breakdown of the Richmond Fed report shows that shipments, new order volumes, order backlogs, capacity utilization, number of employees, average workweek, and wages all increased during the same period. That said, all of these components remain negative, indicating that activity and conditions are still contracting, albeit at a slower pace.

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 2.0 percent. All told, this would mark the seventh 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, the news could hurt risk appetite and thus, lead the US dollar higher. However, if durable goods orders actually rise, carry trades could gain and safe-haven currencies like the greenback may slip.

British Pound the Strongest of the Majors as UK CPI Unexpectedly Rises to 3.2%

The release of UK inflation figures helped to support the British pound throughout much of the day on Tuesday, as the data showed that price pressures unexpectedly increased in February. Indeed, the UK’s consumer price index (CPI) surged 0.9 percent during the month, marking the first increase in six months. Even worse, the annual rate of growth accelerated for the first time in five months to 3.2 percent from 3.0 percent, leaving CPI above the central bank’s inflation target range of 1 percent - 3 percent. These indications of persistent price pressures suggest that the Bank of England may be forced to raise the Bank Rate from its record low of 0.50 percent before year end, and for what it’s worth Credit Suisse overnight index swaps are close to pricing in 50 basis points worth of rate hikes over the next 12 months. Going forward, risk trends are likely to continue serving as the primary driver of GBP/USD price action, but the pair’s break above the 100 SMA ultimately suggests that further upside potential remains.

Euro Pulls Back From 1.3700 - German IFO Report Could Impact Trade on Wednesday

EUR/USD spent much of Tuesday consolidating below 1.3700, and based on the end-of-day break below immediate support at 1.3450, there may be bearish potential left for the pair. Over the next 24 hours, there will be marginal event risk on hand, as the IFO index of German business confidence is forecasted to show broadly weak sentiment on the business climate (down from 82.6 to a new record low of 82.2), current economic conditions (down from 84.3 to a new record low of 82.5), and the outlook for growth (up to 81.5 from the December record low of 76.9). As we saw with the March 17 release of the German ZEW survey, investor confidence on the economic outlook has improved somewhat, but sentiment on current conditions continues to falter. The release of this indicator at 5:00 ET tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

Terri Belkas is a Currency Strategist at FXCM.