The dollar pushes higher after the advanced release for U.S. fourth quarter gross domestic product (GDP) showed a 3.5% increase from 2.0% in the third quarter, overshooting expectations of a 3.0% rise. The sharp boost came from personal consumption, improved trade and rising government defense spending. Inflationary pressures remained under control with the GDP price index unchanged at 1.5%. The fourth quarter employment cost index rose 0.8% vs. expectations of a 1.0% rise.
The Automatic Data Processing (ADP) forecast for private payrolls came in at a stronger than expected 152,000 (forecast 130,000). Recall that the ADP’s forecast for the December private payrolls came in at -40,000, well out of line from the actual 167,000 increase in total non-farm payrolls released by the U.S. Department of Labor.
The 10 am release of the Chicago Purchasing Manager Index (PMI) is expected at 52.0 in January from December’s 51.6. The report may have a significant impact on foreign exchange if it deviates from expectations, as it is used as a reference to Thursday’s national manufacturing Institute for Supply Management (ISM).
Also at 10 am is December construction spending expected flat after the falling 0.2% in November. The report fell 0.3% and 0.8% in October and September respectively.
Will the Fed remove “substantial?” The 2:15 pm Federal Open Market Committee (FOMC) decision is widely expected to leave rates unchanged at 5.25%. There has been much talk about today’s FOMC statement being more hawkish than the December statement, adding focus to the prospects of a return to trend growth later this year, rather than emphasizing the risks to inflation. The dollar may rally if the Federal Reserve removes the the word “substantial” from its description of the slowdown in the housing market. But we expect a neutral to negative dollar reaction if the Fed maintains the use of the “substantial” qualifier because it would send a more vigilant signal by the Fed as far as the potential negative backdrop from housing.
U.S. light sweet crude is down 41¢ at $56.56 per barrel ahead of today’s U.S. inventory data, due at 10:30 am, expected to show a drop in distillate inventories of 2.2 million barrels last week but an increase in crude stocks of 1.1 million barrels. Prices were higher yesterday on the planned 500,000 barrels per day production on Feb. 1 by OPEC, as well as freezing temperatures in Europe and the Northeast United States. There is speculation that Saudi Arabia may reduce oil production by another 158,000 barrels per day from today. The Iran factor continues to hover around oil prices as the threatening language from the U.S. Administration directed at Tehran continues.
There were also reports from the Financial Times that the international Atomic Energy Agency fears that Iran may be less than two weeks away from bolstering its nuclear program with the installation of 3,000 centrifuges to enrich uranium. The escalating tensions in the Gulf have not only helped boost oil prices above the mid $50s but have also maintained gold prices above the $640 per ounce level. Last week, the metal reached a five-month high of $654.40 per ounce.
EUR/USD set to target 1.29, but "substantial" reference scrutinized
Unemployment declines in Europe have failed to prop the euro today, as traders are cautious ahead of the incoming string of U.S. releases and events. Euro zone unemployment fell to 7.5% in December from 7.6% in November, extending its downward trend of the past two years. More significantly, German unemployment tumbled to 9.5% in December from 9.8%, reaching a five-year low. The adjusted number of unemployed fell 106,000 to 3.98 million, well over the expected decline of 40,000.
We expect the pair gradually to return to the 1.2920s ahead of the FOMC decision, especially if the Chicago PMI comes in at least at 52.0. The main factor that could spur the euro would be the FOMC’s repeated use of the term “substantial” referring to the housing slowdown, as that would tell us that the Fed remains preoccupied with the overall deteriorating trend despite recent signs of improvements. In that case, we would expect EUR/USD at 1.2980, followed by 1.3030, the 38% retracement of the 1.3289-1.2863 move. Subsequent resistance upside capped at 1.3050. Support starts at 1.2950, followed by 1.2920. Removal of the word “substantial” may extend declines past the 100-day moving average of 1.2895 and onto 1.2860.
USD/JPY pressured by officials’ remarks The yen pushed higher across the board after U.S. Treasury Secretary Hank Paulson said the currency would be discussed in next week’s G7 meeting. This adds a key element to the USD/JPY equation after yen talk was largely confined to European officials. Risks remain slated to the downside for the pair, with interim support standing at 121.20, backed by 120.80. Key support stands at 120.50. Upside seen initially capped at 121.55-60, followed by 121.80.
USD/CAD eyes 1.1850 Canadian GDP rose 0.2% in November from a flat October figure, undershooting expectations of 0.3%. USD/CAD technicals suggest further upside towards the 1.1850 as the consolidation continues into the second week. With the risk of rising oil prices acting as cap at 1.1850, selling pressure appears significant at this level, with downside targeting 1.1790, followed by 1.1750.
Aussie risks 76.80 The continued decline in AUD/USD in light of last week’s soft CPI figures makes the 76.80 the next interim target—50% retracement-- which could be breached in the event of a hawkish FOMC statement. Further declines seen if it continues its slump until 76.60. Upside seen capped at 77.25, followed by 77.40.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 faxa.laidi@cmcmarkets.com
