Wednesday January 25, 2006 - 15:04:55 GMT
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Forex Market Commentary and Analysis (25 January 2006)
The euro slumped vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2250 level and failed to get above the $1.2325 level. Technically, the common currency established a fresh multi-month high today going back to 14 September 2005. The pair has yet to test the $1.2340/50 levels, representing the 38.2% retracement of the move from $1.3480 to $1.1640. The euro temporarily moved to intraday highs after the released of a stronger-than-expected German Ifo survey that saw the January business climate index rise to 102.0 from 99.7 in December, the highest print in five years. Similarly, the expectations index reached 103.6, an eleven-year high. European Central Bank President Trichet, who will speak later today, has repeatedly said an improvement in sentiment and consumer confidence is most important to a recovery in the eurozone economy. These data, along with strong French confidence data released today, render it more likely the European Central Bank will move interest rates higher earlier in 2006. Many traders now believe March is the month when ECB policymakers could decide to next tighten policy, and the Euribor futures market is now pricing in around three interest rate hikes for all of 2006. ECB’s Bini-Smaghi will be quoted in the German press tomorrow as saying the ECB should be “careful” about tightening policy at this early stage. In contrast, most FX traders believe the Federal Open Market Committee will raise rates no more than twice in 2006 – definitely next week by +25bps and possibly on 28 March by +25bps. Incoming Fed Chairman Bernanke’s congressional testimony in February will be closely scrutinized to see if and how he differs from outgoing Chairman Greenspan’s governance of the Fed. Data released in the U.S. today saw December existing home sales fall 5.70% to 6.60 million units. In other eurozone news, the German government lifted its 2006 growth forecast to 1.4% and German December import prices climbed 0.3% m/m and 6.8% y/y. Euro offers are cited around the US$ 1.2360 level.
The yen weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥115.25 level and was supported around the ¥114.60 level. Technically, today’s intraday high is right around the 23.6% retracement of the move from ¥121.40 to ¥113.40. Minutes from the mid-December Bank of Japan Policy Board were released today and they evidenced discussions among policymakers about what type of monetary policy framework to implement after the long-standing quantitative easing policy ends. Most traders believe the BoJ will begin to unwind its quantitative easing policy in 2006 after several years of battling deflation. Policymakers discussed the adoption of a formal inflation target as one possible policy framework. It is likely that it will take at least a couple of years for interest rates to normalize in Japan. January Tokyo-area consumer price inflation data and December nationwide inflation data will be released on Friday and will provide the latest snapshot of deflationary pressures in the economy. The Nikkei 225 stock index climbed 0.01% to close at ¥15,651.00. Dollar bids are cited around the ¥114.60/ ¥113.55 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥141.35 level and was supported around the ¥140.75 level. Stops were hit above the ¥141.10 level, representing the 61.8% retracement of the move from ¥143.60 to ¥137.10. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥205.95 and ¥91.30 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0629 in over-the-counter trade, up from CNY 8.0623 while the dollar closed at CNY 8.0619 in exchange-traded activity, up from CNY 8.0614. Chinese officials attending the Davos forum announce the yuan will be “totally convertible…in the future” but did not indicate a time frame. Data released in China today saw 2005 GDP climb 9.9% while CPI was up 1.8% last year. Also, fixed-asset investment gained 25.7%, total retail sales escalated 12.9%, and industrial value-added output was up 11.4%.
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7935 level and was supported around the $1.7815 level. Technically, today’s intraday high was just below the 61.8% retracement of the move from $1.8495 to $1.7045 and the pair consolidated around the 50% retracement of the move from $1.9225 to $1.7045 during North American dealing. Sterling gained ground after the release of U.K. Q4 GDP data that confirmed the economy expanded at its trend rate of growth – a quarterly +0.6% gain – for the first time in one year. The pound also benefited from the release of the January Bank of England Monetary Policy Committee meeting minutes that saw an 8-to-1 vote to keep borrowing costs unchanged at 4.50%; the dissenter, Stephen Nickell, voted in favour of cutting rates. This renders it likely the MPC will not reduce borrowing costs in February and calls into question the possibility of unchanged interest rates for some time. Cable offers are cited around the US$ 1.8030 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6855 level and was capped around the £0.6890 level.
The Swiss franc was mostly unchanged vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2570 level and encountered offers around the CHF 1.2640 level. Technically, today’s intraday high was right around the 61.8% retracement of the move from CHF 1.2240 to CHF 1.3285. There are three main themes regarding Switzerland now. First, traders continue to be alert to heightened geopolitical tensions involving disruptions to Nigeria’s oil production capacity and Iran’s nuclear ambitions. Safe-haven flows typically favour the Swiss franc during periods of tension. Second, the January KOF Swiss leading indicator will be released on Friday. Third, the World Economic Forum begins in Davos and runs through Sunday. Dollar bids are cited around the CHF 1.2520 level. The euro weakened vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5470 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2570 level.
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