US Dollar
Today's data gave the market another taste in the state of the housing market, and that taste was not what dollar bulls were hoping for. According to the US Census Bureau, both measures of housing starts and building permits, which include both residential and non-residential properties, for December fell short of already downgraded expectations. Builders broke ground on 1.933 million new homes last month following a revised 2.121 million starts in November. At the same time, building permits fell to a nine month low 2.068 million permits. This data seems to finally offer solid evidence that the booming housing market which has been a major contributor to economic expansion over the past couple years, could be winding down to a close. Furthermore, it offers confirmation to out-going Fed Chairman Greenspan and newly appointed Ben Bernanke that the Fed's 13 consecutive hikes to the fed funds rate is finally paying off in controlling the market that Greenspan said was beginning to show signs of "froth." Subsequently, another substantial component to inflation is taken off the table. Another selling point for the dollar came later in the day when the Philly Fed index, measuring factory activity in the area, for January fell sharply. After the greater than expected decline in the Empire state manufacturing index earlier in the week, the steep drop from 10.9 to 3.3 in manufacturing for the Philadelphia area adds to concerns that, like the housing sector, the manufacturing sector could be weakening. The final word for manufacturing however will lie with the nationally-based ISM manufacturing number which is scheduled for release on February 1st. Some of the bearishness garnered from these disappointing figures was offset by initial jobless claims for the week ending January 14th. First time claims for unemployment benefits for the period fell to 271,000 -- the lowest level since April of 2000. Continuing claims for the previous week also slowed further than expected to 2.534 million.
Euro
It was back and forth for the euro as mixed inflation data reported with trade numbers. Two reads of price growth were offered on the day with German producer prices rising 0.3 percent for the month of December and notching higher to 5.2 percent on an annual basis. Consumer prices for the Euro-zone, on the other hand, slowed on an annual basis from 2.3 percent to 2.2 percent for the same month. While the obvious implications to interest rate policy were present, speculation for another rate hike from the usually transparent ECB were salvaged with the Bank's chief economist Otmar Issing statement that it was possible that further growth in oil prices posed a credible threat in triggering price growth in other sectors. Further pressing on the currencies strength was the Euro-zone trade balance which fell into deficit in November for only the third month in three years. The 2.3 million euro deficit, although small, lays furtile ground for a broader gap with the resurgence of energy prices in the months that followed.
British Pound
Though there weren't any data releases at the time, the pound managed to fall dramatically to a one-week low during the Asian trading hours. After spending much of the morning under pressure after a fairly negative economic report, the pound recovered almost just as quickly in a bout of dollar weakness that left the greenback lower against most other majors. Today's main piece of UK economic news was the quarterly economic survey published by the British Chambers of Commerce. The group cited modest improvements in the manufacturing and service sectors while stressing that there is still weakness across the board. In addition, services employment, which makes up a majority of the labor market, worsened in the quarter along with export performance. The recent weakness in employment, as seen in the rising unemployment rate published in the latest labor force survey, indicates further sluggishness in consumer sentiment and spending. With this in mind, the BCC stated pleas for both the central bank and government to loosen monetary and fiscal policy. They are now encouraging "an early interest rate cut" from the MPC while also asking the government to clearly ensure businesses that there will be no new tax hikes. With these comments in mind, it could be very likely that we see a rate cut sometime in the next few meetings, which may make it difficult for the pound to profit off of the end to the FOMC tightening cycle.
Japanese Yen
The yen held steady today after the Japanese stock indices recovered following the dive in the Nikkei seen earlier this week. Just prior to tomorrow's monetary policy report, the Cabinet Office released their own monthly economic assessment today. The consensus still seems to be that the recent recovery continues to be led by growing corporate profits and an improving export picture. The Japanese consumer, though supported by wage increases and larger year-end bonuses, is not yet picking up the slack in household spending. The latest household confidence numbers posted an impressive rise on a seasonally adjusted basis, however this improved sentiment could be at risk given the latest developments in the country's Livedoor scandal. A former executive of the firm who has also been involved in a number of investment deals and IPOs, committed suicide two days following prosecutors' raid of the company, fostering suspicions of extent of the alleged crimes. The Minister for Financial Services also made disheartening comments implying that if the order capacity of the Tokyo Stock Exchange isn't expanded, then the exchange "may not be worth keeping in existence." Taking these structural issues into account, it may become even more apparent to policy-makers that the country is not yet ready for a positive change in interest rates.
Kathy Lien is the Chief Currency Strategist at FXCM.