Currency pair trading was mixed in New York in a choppy, but subdued, two-sided trade. The Dollar gained early following the release of stronger than expected preliminary Q4 labor costs, which reversed the previous quarterâ€™s 2% decline, increasing 2.1%. In other U.S. economic data, productivity fell to 1.8% from 6.3%. This was better than estimates of a sharp decline to .04%.
Treasury Secretary Paulson made midday comments mentioning FED credibility and inflation. This was enough to top out the U.S. equity markets sending both the CHF and JPY lower. The CAD managed to gain on the day following Paulson's comments.
All eyes will be focused on the GBP and EUR tomorrow as traders await central bank releases. Many traders took to the sidelines today cutting down the range on these two currencies. Expectations are for strong volatility tomorrow following the release of the central bank announcements.
The Pound fell to its lowest level in two weeks following the release of the UK Consumer Confidence report. The decline took the index to its lowest level since May 2004. Consumer confidence now stands at 81, down from 85 in December. This was another sign of a weakening British economy, as the Bank of England stands ready to stimulate the economy with another 25 basis point cut tomorrow morning. Bearish fundamentals continue to dominate the British economy especially in the housing and manufacturing sectors. Pay close attention to the Bank of England's statement regarding future interest rate action. Expectations are for further cuts as inflation does appear not to be a threat.
The EURO reversed early session weakness as traders evened up positions in anticipation of tomorrow's ECB announcement. The ECB's statement will be scrutinized closely despite the presumption that they are likely to leave current rates unchanged at 4%. Traders will be attempting to get direction as to further cuts in the future due to perceived notions of a slowdown in growth. The ECB tends to maintain a strong stance against inflation. Nevertheless, look for rhetoric which indicates the possibility of a future rate cut rather than an increase.
In other interest-sensitive news, AUD and NZD continued their short-term slides, as the rate hike in Australia earlier in the week is likely to be last for a while. There is still some talk of a BOJ rate cut to curtail any bullish interest in the JPY. This may come to fruition if the JPY tests its recent bottom at 104.96.
This week's reports include: U.S. Initial Claims (2/7, 8:30 EST), December Pending Home Sales (2/7, 10:00 EST), December Consumer Credit (2/7, 15:00 EST) and December Wholesale Inventories (2/8, 10:00 EST).
EUR/USD â€“ The EUR retraced into an important support zone today. The main range is 1.4952 to 1.4364. This range creates a key support zone at 1.4658 to 1.4589. Today's low came close to penetrating the low end of the key support zone and attracted some buying interest at 1.4590. Despite the sell off the past few days, the main trend is still up. Currently the short-term range is 1.4952 to 1.4590. If today's low holds, then watch for a rally to 1.4771 â€“ 1.4814. Regaining the main 50% level at 1.4658 will also be a sign of the EUR regaining strength.
USD/JPY â€“ Early gains were erased when the market turned south following the intraday top in the U.S. equity markets. The market is still trading inside of a tight range with a possible higher bottom forming at 105.71. This area must hold on any break or a retest of the recent main bottom at 104.97 is likely. Currently, the main range is 104.97 to 107.88. This creates a key pivot price at 106.42. This price is key to the potential bullish formation taking place. Watch this price for short-term direction. The tight range and support base indicates the possibility of a strong breakout rally should the JPY cross the last main top at 107.88. Either way, expect volatility any day now as this market is not likely to continue in this tight range for much longer.
GBP/USD â€“ Once again, the GBP tested a major retracement zone at 1.9646 to 1.9573. Despite penetrating the low end of this key support zone, the market was able to regain 1.9573 late in the session. This is potentially bullish as the daily/weekly reversal bottom is still in tact after two weeks of trading. Most of the recent sell off has been expected technically, as markets often retrace the first leg of a reversal bottom. Regaining the 50% price at 1.9646 will be a strong sign that buyers have stepped into the market. If todayâ€™s low at 1.9552 holds, then expectations are for a rally to at least 1.9754 â€“ 1.9802. If the resistance at 1.9797 â€“ 1.9802 is taken out, then look for aggressive short covering and new buying which could trigger at further rally to 2.024 = 2.046. This potentially bullish formation falls apart if 1.9552 fails to hold.
USD/CHF â€“ The CHF turned down intraday when the U.S. equity market topped. The main range is 1.1594 to 1.0728. This creates a major resistance zone at 1.1161 â€“ 1.1263. This is the next upside target should the current short-term rally continue. Based on the weak trading action on Wednesday, the market could retrace the first leg up to 1.0892 â€“ 1.0853. Counter-trend traders should look for buyers to step in at this level.
USD/CAD â€“ The main range is 1.037 - .9872 with a key resistance area at 1.012 to 1.018. The market looks as if its regaining strength, however, this retracement area is currently in the way. A pullback to .9976 must attract buyers or this pattern will fail. Look for buyers to step in on any pullback to trigger the break out rally we need for a test of 1.012 â€“ 1.018. Until this resistance is taken out, look for choppy two-sided trading.
NZD/USD â€“ More selling pressure is expected today as the market seems poised for a retracement to .7674 - .7605 likely. With the main trend still up, look for buyers to come in at this area. The market may be oversold in the short term, which could trigger a rally to .7873 tomorrow. If sellers step in at this price, then this may be a sign that the short-term trend is ready to turn down.
AUD/USD â€“ Traders continued to sell the AUD following the recent rate hike. This indicates that the cut earlier in the week may be the last. Look for a break to .8805 - .8736 for the next buying opportunity since the main trend is still up. In the short term, a rally back to .8955 may attract countertrend selling.
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