The stronger than expected 4.8% increase in new home sales to 1.12 million in December and the upward November revision from 1.04 million to 1.069 million are boosting the already firming dollar, but rising crude oil prices to the $55 level are slowing the rise in the greenback.
The dollar strengthened across the board in European trade ahead of what could be a solid week for the U.S. currency; namely a more hawkish Federal Open Market Committee (FOMC) statement, an estimate in the 3.0% handle in U.S. fourth quarter gross domestic product (GDP) and another strong non-farm payrolls report. Wall Street Journal Fed columnist Greg Ip said today the Fed will likely reaffirm its tightening bias amid tightening labor markets, stabilizing growth while addressing the possibility of a rate hike later in the year. With the market still pricing a 25-basis point rate cut later in the year, a reversal of such pricing has the potential to trigger aggressive bouts of dollar strength, especially ahead of the expected strengthening in this morning’s releases of durable goods orders and new home sales, as well as next week’s potentially dollar positive dynamics.
Durable goods rose 3.1% in December following an upward revised 2.2% rise in November from initial estimates of a 1.6% increase. More importantly, the ex defense figure rose 3.9% from 0.7% while the ex transportation rise 2.3% following a 1.0% decrease.
Expect EUR/USD to drop below 100-day moving average to 1.2850The euro fell to one-and-a-half-week lows at 1.2873, right at the 100-day moving average despite a 9.3% jump in M3 money supply in November from 8.5% in October, the highest figure in 16 years. The underlying dynamics of renewed Fed hawkishness, firm U.S. fourth quarter GDP and strong U.S. nonfarm payrolls are weighing on the single currency. We expect EUR/USD to prolong its weakness past the 1.2880 and onto 1.2850, until finding stability at 1.2820. We expect losses to stabilize at 1.2850, with foundation acting at 1.2820. Upside capped at 1.2940.
The higher than expected U.S. weekly jobless claims report is supporting EUR/USD at 1.2975-80. This could set the foundation for further gains past the 1.30 figure and onto the 1.3050 upon what may be weaker existing home sales from the United States. Rising gold prices may also help underpin the single currency. Germany’s Deputy Economics Minister Pfaffenbach said his country was not planning to place yen weakness on the G7 agenda, indicating that yen weakness is a matter of concern of but is for the markets to deal with.
Pre-G7 talk unable to boost yenEmerging speculation that European officials will raise concerns over yen weakness at the coming G7 meeting are doing little to alter the currency's soft tone mainly because these concerns are expected to be limited to corridor chatter among officials rather than make it into the official communiqué on foreign exchange. Besides, with China's currency once again expected to be mentioned in the official communiqué, this will shadow any talk about yen weakness. It is also important to stress the prolonged positive dollar impact (negative yen effect) from a hawkish Fed statement next week will likely shadow any talk of yen weakness. The 0.3% year over year rise in Japan’s CPI did little to boost the yen and we do not yet see a February rate hike as certainty.
The strong U.S. home sales report seen should help extend USD gains towards 121.55-60, followed by 121.80. We expect the downside to stabilize at 121.25, followed by 120.80.
Ashraf Laidi
Chief FX Analyst
CMC Markets US140 Broadway, 30th FloorNew York, NY 10005(212) 644-4220(212) 644-4222a.laidi@cmcmarkets.com
