Wednesday January 26, 2005 - 20:58:55 GMT
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DailyFX Forex Fundamentals 01-26-05
DailyFX Forex Fundamentals 01-26-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Euro Rises On Stronger IFO Survey
· Pound Soars On Upward Revision to UK GDP
· Dollar Yen Trades Back Lower On More G7 Speculation
The euro retraced all of yesterday’s losses, following the stronger than expected German IFO survey of business sentiment and larger current account surplus. The headline number rose to an 11-month high led by a gain in the expectations component. This upward surprise comes on the back of a strong ZEW survey of analyst sentiment released two weeks ago. The sentiment of retailers and builders increased the most, suggesting that domestic demand has been improving. The German economy is rebounding gradually, while the outlook for the country is becoming rosier. Adding to bullish sentiment in the euro was the larger than expected current account surplus reported for the month of November. The surplus increased to EUR 3.2 billion from EUR 1.2 billion the previous month. However, the data was slightly distorting since the surplus fell on a seasonally adjusted basis. Overall though, sentiment is most likely the primary guide for euro strength. The 1.2930 / 1.2950 level has proven to be strong support technically. Fundamentally, data and recent developments still favor a weaker dollar. As such, we are still supportive of a near term resumption of the downtrend in the greenback.
The New York trading session has been fairly quiet with the lack of any US economic data. The dollar has gradually grinded lower against all of the majors. However, this relative calmness will be short lived, as tomorrow we have a very busy US economic calendar. We are expecting durable goods, jobless claims and the help wanted index. Durable good orders are expected to fall to 0.7% from 1.4%. However, new orders for Boeing could lift the overall report. Jobless claims will be particularly important following the sharp drop in last week’s report. It is expected to rebound from 319k to 330k. Meanwhile, gyrations in the market have once again been spurred by G7 speculation. In slight contrast to comments made by China’s head of the National Bureau of Statistics yesterday, the Finance Minister said today that they intend to conduct “deep” conversations with the G7 in regards to the Renminbi. This provided some optimism for the dollar overnight. However, in all likelihood, the G7 will be leaving the FX language in their statement unchanged. Even if China is ready to discuss the Renminbi, they are not ready to do anything about it. Meanwhile in Swiss news, Swiss National Bank President Hildebrand confirmed our belief that the SNB will continue to remain on hold for some time. He said that even though the economy is improving, the growth is not significant enough to lower employment.
The British pound rallied 175 pips today, erasing all of yesterday’s losses following a much stronger than expected fourth quarter GDP report. Although weaker retail sales spurred speculation that growth would disappoint in the fourth quarter, increased service sector activity led the economy’s overall expansion. The near equal mixture of good versus bad data has kept the British pound trapped within a broad trading range since the beginning of this year. It has also kept Bank of England monetary policy unchanged. The latest minutes from the January 12-13 monetary policy meeting indicates that the committee members voted unanimously to keep interest rates unchanged for the fifth consecutive month at 4.75%. Unlike the minutes from the prior meeting, these minutes contained no discussion about a rate cut. Reflecting mixed data, the tone was relatively neutral.
The dollar has gradually weakened over the past 24 hours following the warning from the Chinese Finance Minister that the Renminbi will indeed be discussed at next weekend’s G7 meeting. However, putting Renminbi speculation aside, the market should really be focusing on all of the economic data scheduled for release tonight and tomorrow night. This evening, we will be receiving retail sales data. Tomorrow, we are expecting data on household spending, inflation, the labor market, industrial production, housing starts, and the trade balance. Retail sales are expected to have rebounded during the month of December following the deterioration in the previous month. Holiday spending should contribute to a stronger report. Meanwhile last night, Japan reported generally in line merchandise trade data. Exports increased 8.8% y/y while imports increased 10.9% y/y.
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