The U.S. dollar hits two-month lows against the euro and the Aussie, and two-week lows against the yen and pound sterling on increased signs of higher interest rates in the Euro zone (strong M3 and regional CPI), heightened uncertainty on the Iranian front and emerging concerns with sub-prime lending by mortgage lenders in the United States. The reported targeting of U.S. Vice President Dick Cheney in an explosion in Afghanistan is also fuelling geopolitical jitters against the dollar. The impact of these factors is damaging the U.S. currency on both sides of the FX equation:
Stronger growth and inflationary prospects in the Euro zone.
Increased chances of Fed easing on the grounds of eroding U.S. consumer demand from protracted increase in oil prices.
The potential of systemic risk from troubled lenders of sub-prime mortgage lending.
The ongoing recession in U.S. manufacturing and expected downward revision in U.S. gross domestic product (GDP) growth are also weighing on the U.S. currency.
Continuing speculation that the U.N. Security Council and Germany will harden the sanctions against Iran for ignoring the calls by the IAEA to halt its uranium enrichment have sparked belligerent remarks from the oil producer regarding its readiness to go to war. Rising oil and gold prices are accompanying the escalating uncertainty in the Middle East, with oil near its fresh high for the year at $61.37 per barrel and gold $3 off yesterday’s nine-month high of at $687.30 per ounce.
The concentration of today’s U.S. data releases start at 10 am EST with existing home sales expected to have increased 0.3% to 6.24 million in January from December’s 6.22 million. The monthly series have shown tremendous volatility, but the family sales have shown a more continuous downtrend. On the bright side, the year on year rate has also smaller declines, with -11.5%, -10.8% and -7.9% registered in October, November and December respectively.
Also at 10 am EST is February consumer confidence, expected to drop to 108.7 from 110.3 in January. Some forecasts run as low as 105. The market will likely show more attention to the existing home sales, but any positive dollar reaction may be tempered by the fact that new home sales have yet to be released on Wednesday.
The other factor likely to maintain dollar bulls on the sidelines is Wednesday’s fourth quarter GDP release, which is expected to be revised to as low as 2.0% (consensus 2.3%) from the initial estimate of 3.5% due to falling retail sales, rising trade gap, lower inventories and slower construction spending. The GDP report will not only signal that the much anticipated rebound in fourth quarter growth following 2.0% in Q3 would have never taken place, but also suggests that U.S. growth would have dropped below Japan’s and the Euro zone. In the face of these realities, markets may not buy into the Federal Reserve’s hawkish language, which we deem a rhetorical tool to stave off inflationary pressures via supporting bond yields and the U.S. dollar, rather than signaling an interest rate hike.
EUR/USD breaks 1.32, eyes 1.325, week’s target at 1.3280 EUR/USD broke the key 1.32 resistance after Euro zone M3 money rose to its highest level in 17 years with annual three-month average growth up 9.8% y/y, strengthening the case for a 25-basis point European Central Bank (ECB) rate hike to 3.75% in March and a possible 4.0% reading before the end of the second quarter. High CPI readings in Germany’s regional inflation last month are also cementing the inflation argument to higher ECB rates. ECB VP Garganas provided his own hawkish view, saying inflation risks are on the upside and continue to grow, a statement indicative of higher ECB rates in the short term.
EUR/USD attained the 1.3220 resistance we signaled yesterday, opening the way for 1.3255 later today. We could see possible retracement towards 1.3180 and 1.3160 but risk of renewed EUR/USD upside on back of negative U.S. data likely to retrigger buying towards 1.3255, until key resistance at 1.3275. Major barrier for week at 1.3320.
USD/JPY damage to extend towards 118.40 support The deteriorating technical picture on the daily and weekly chart in USD/JPY opens the way for the 118.84 target –100-day moving average and 118.39 –55 retracement of the 114.41-122.18 high. Despite talk of the Bank of Japan’s prolonged dovishness, it’s likely to prompt renewed yen carry trades, the threat of U.S. data weakness may play the USD side of the USD/JPY equation, which could drag the pair to as low as 118. Upside capped at 119.70 and 120.
EUR/GBP boosted by improved fundamentals
With EUR/USD outperforming GBP/USD and with the ECB hawkishness muting that of the BoE, EUR/GBP accumulates fresh bullishness, now eyeing interim resistance at 67.30, followed by 67.50. Trend line resistance stands at 67.70, followed by 68 –61.8% retracement of 69.59-65.34 move.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 fax a.laidi@cmcmarkets.com
