USD survives steadily

Wednesday, February 10, 2010

After one of the most volatile weeks in the Forex Market this year, this week got off to a slow start- however, today's busy events will sure put an end to this week's relatively smooth sailing.
The speculator news that the European Union may by coming to the rescue of its deficit ridden member, Greece, put the brakes on the EUR/USD downwards slide - causing the dollar to distance itself from last Friday's 8 month high of 1.3595USD/EUR. In hopes of containing the debt crisis that many fear could spread to Portugal, Spain, and Italy, the EU is meeting all Thursday in Brussels.

With risk appetite rising, the dollar also came under pressure versus the sterling, dropping to 1.5750 from Friday's 8-month high near 1.5530.After a slow start to the week, shortly after midnight yesterday the UK simultaneously released two interesting reports - the British Retail Consortium showed retail spending increased at an annual pace of 1.2% in January after surging 6.0% in the previous month to mark the slowest pace of growth in at least 15 years and the Royal Institution of Chartered Surveyor home price balance index increased to 32% from 30% amid expectations for a drop to 27%.

These two reports were followed by the UK's awaited Trade Balance-despite expectations that the UK's trade deficit would contract slightly from its prior level of 6.8B to 6.6B, the deficit unexpectedly widened or December, slipping to a new low of 7.27 Billion Pounds. Following news of the increased trade deficit, the Pound continued to fall against its major counterparts –the EUR/GBP broke to a 3-week high- increasing from the day's opening level of 0.8755 hitting 0.8820 shortly after the trade balance was released.

Later today, we can expect more volatility in the GBP, as the UK will release (at 930GMT) its monthly Manufacturing Production. This major indictor of the economy remained unchanged in the past two months, disappointing the Pound. This time, a rise of 0.4% is predicted. An hour after the release of this report, the BoE will announce its Inflation report- an important quarterly event, in which the central bank projects the inflation and economic growth for a long time forward.

The Bank of England's February Inflation Report is likely to justify only modest policy tightening, with inflation on unchanged rates likely to be shown coming in above target at the end of the two year forecast horizon. On market interest rates, analysts think inflation will be projected below target two years out, with the BOE forecasts endorsing the view that only relatively small increases in Bank Rate will be needed to get inflation back on track.

While falling against both the Euro and the Pound, the USD managed to stay steady versus its neighboring currency- the CAD. However, this currency pair could come under extensive pressure today as both the US and Canada will simultaneously release their trade balance reports. This double hitter event typically ignites a volatile movement in the pair- however, which way the pair will move is yet to be seen.

With Canada's trade balance expected to be almost perfectly balance, analysts are predicting a small deficit of 0.1B, the US is predicting that vast deficit might contract slightly, from its previous level of 36.4B to an expected deficit of 35.8B. While a contraction in a trade deficit might appear as a positive indicator, this is not the case for the US. A contraction in the deficit would signify that foreign countries are less willing to sell goods to America in exchange for U.S dollars- resulting in a depreciation of the dollar.

Shortly after midnight (0030GMT), Australia released its monthly home loans – while analysts were predicting a fall of 4.8%, the Australian Bureau of Statistics reported that the number of home loans extended last December by 5.5%.

This report follows yesterday's Westpack Consumer Sentiment index which slipped 2.6% to 117 from 120.1 in the previous month – a reading above 100 means that optimists outnumber pessimists. While Australian Consumer confidence fell this month, it is still 2.9% above the December 2009 reading and 15.2% above its long term average.



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