Thursday December 29, 2005 - 15:58:32 GMT
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Forex Market Commentary and Analysis (29 December 2005)
The euro was largely unchanged vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1880 level and was supported around the $1.1820 level. Liquidity and market conditions remain lessened ahead of this weekend’s New Year’s holiday with many traders off their desks until early next week. Data released in the U.S. today saw existing November home sales decline 1.7% to 6.97 million units, the first time this number has been below the 7.0 million mark since March. These data likely reflect the ongoing effects of the Federal Reserve’s continued monetary tightenings. The Federal Open Market Committee is likely to raise the federal funds target rate by +25bps to 4.50% in about a month, possibly depressing the U.S. housing market further. The lingering question on traders’ minds is what Fed policymakers will do at their 28 March meeting. Most traders expect the fed funds target rate to top out between 4.75% - 5.00% in 2006. Another factor that may dent the dollar in 2006 is the end of the 2005 corporate profits repatriation program that provided a one-time U.S. tax break to U.S. companies. These real dollar inflows have benefited the greenback as corporations repatriated retained earnings previously held in other currencies. On a positive note for the dollar, consumer sentiment and consumer confidence have largely returned to pre-hurricane levels and traders will see if these rallies can be extended into 2006. Euro offers are cited around the US$ 1.1885 level.
The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥117.70 level and was capped just below the ¥118.00 figure. The pair was confined to an extraordinarily tight range in the Australasian and European sessions as dollar bulls tried to maintain the pair’s gains from yesterday. Technically, the dollar is poised to realize its first losing month since August, and only its third losing month all year. Still, the dollar has managed to establish a new 2005 high in December and tested the ¥120.50 level, the 50% retracement of the move from ¥159.90 to ¥81.10. The big question on traders’ minds for 2006 relates to deflation. Japan is likely to emerge from a tough battle with deflation next year but it remains unknown exactly when Bank of Japan will begin to unwind its long-standing quantitative easing policy. Even when it does so, it will likely take years for the central bank to normalize interest rates. Data scheduled for release in Japan overnight include November housing starts, construction starts, and construction orders. The Nikkei 225 stock index climbed 0.92% to close at ¥16,344.20, a fresh five-year high. Dollar bids are cited around the ¥116.55 level. The euro came off marginally vis-à-vis the yen as the single currency tested bids around the ¥139.30 level and was capped around the ¥139.85 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥203.15 level while the Swiss franc came off vis-à-vis the yen and tested bids around the ¥89.35 level.
The British pound appreciated moderately vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7245 level and was supported around the $1.7165 level. Technically, the pair is trying to establish a short-term base around the $1.7195 level, representing the 23.6% retracement of the move from $1.7405 to $1.7125. Chartists are eyeing the $1.7235/ 65 levels as the next upside targets ahead of additional technical resistance around the $1.7300 figure. Recent U.K. housing data have suggested that housing market activity and prices continue to moderate. The big question on traders’ minds is how robust – or flat – the holiday shopping period was in the U.K. this year. The answer to that question may very well determine the near-term direction of U.K. interest rates. Some traders expect Bank of England’s Monetary Policy Committee to reduce interest rates, perhaps as early as February or March. Cable offers are cited around the US$ 1.7290 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6870 level and was capped around the £0.6900 figure.
The Swiss franc was little-changed vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.3115 level and was capped around the CHF 1.3180 level. Technically, the pair continues to orbit the CHF 1.3160 level, representing the 76.4% retracement of the move from CHF 1.3285 to CHF 1.2770. Dollar bids are cited around the CHF 1.3025 level. The euro was largely flat vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5575 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2680 level.
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