USD – The USD is stronger against most major currencies with the exception of the JPY, as US economic data released today suggests that the economy is continuing to grow moderately. The Consumer Price Index remained flat in December, pointing to muted inflation pressures that should provide the Federal Reserve extra room to accelerate the economy by continuing on with its ultra-accommodative monetary policy. The Fed said last month that they would keep interest rates near zero at least until the jobless rate falls to 6.5%, as long as the central bank believes inflation will stay below 2.5%. Today’s CPI data reinforces the Fed’s view that inflation will not hit the 2.5% threshold in the near future. US industrial production rose 0.3%, rising for a second straight month in December after sluggish industrial output data in October from Hurricane Sandy. The greenback appears to be building a short-term base ahead of the next FOMC interest rate decision later in the month. Expect bullish sentiment towards the dollar in the days ahead as central bank officials scale back their willingness to expand the balance sheet further.
EUR – The euro declined against the US dollar for the second day as soothing comments about the currency's recent strength made by a European Central Bank policymaker gave way to profit taking and concerns about the region's economy. The euro briefly turned positive after ECB member Ewald Nowotny said the exchange rate was "not a matter of major concern," a strong contrast to comments from Eurogroup head Jean-Claude Juncker who on Tuesday prompted investors to sell the single currency by stating it was "dangerously high." Nowotny's comments briefly supported the euro, but that faded quickly as positive earnings in the U.S. supported a U.S. growth outlook story and contrasted with the situation in the euro zone. Weak economic data from Europe highlighted a disparity with the U.S. economy, which has been recovering, although not fast enough to change the Federal Reserve's policy. Demand for new cars in Europe fell to a 17-year low in 2012, with top producers like Volkswagen suffering heavy falls. The news comes a day after Germany said its economy shrank at its fastest pace in almost three years in the final quarter of 2012.
GBP – Sterling dropped to a 7-week low against the US dollar, hurt by UK economic worries and as Fitch rating agency warned about the UK's credit rating, though it recovered from a 9-1/2 month low against the euro. The pound was down 0.3 percent at $1.6013, having fallen to $1.6003, its lowest in a week. Concerns about the UK economy increased on news this week that UK music and DVD retailer HMV went into bankruptcy, while analysts said investors could be wary before UK retail sales figures on Friday. Fitch also warned late on Tuesday that "the risks are clearly increasing for the UK," and that it could downgrade the country if the March budget shows debt levels continuing to rise.
JPY – The Japanese yen extended its gain for the second day after a warning about its excessive weakness by a Japanese cabinet minister. Many market players think the yen's latest rebound is a small correction in a long-term downtrend, which started late last year on expectations that the Bank of Japan will be forced to take bold action to reflate a sluggish economy. New Prime Minister Shinzo Abe has been very vocal about getting the BOJ to tackle deflation once and for all, calling for a two percent inflation target. The BOJ is widely expected to do just that at its policy meeting on Jan 21-22.
Commodity Currencies– The Australian and Canadian dollars held near multi-month highs against the US dollar with the Aussie steady at $1.0563, within reach of a four-month peak of $1.0600 set last week. The Aussie was underpinned by a modest improvement in Australian consumer confidence and record high car sales, a sign that consumers are still ready to spend on big ticket items even while saving elsewhere. The Canadian dollar drifted lower against the US dollar and dropped the most in a week as government officials in Russia and Japan criticized monetary policies that have devalued major currencies in an attempt to spark economic growth.
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