•             USD weakened despite strong data

•             EUR is supported by strong bond auction

•             Commodity Currencies lower on weaker data

USD – The U.S. dollar weakened against the euro and yen despite the release of strong durable goods figures and after the release of stronger pending home sales this morning.  Durable goods orders for core capital goods, which include industrial machinery, construction equipment and computers, rose 6.3 percent in January from December.  The National Association of Realtors said Wednesday that its seasonally adjusted index for pending home sales rose 4.5 percent last month to 105.9, the highest level seen since April 2010.  The market also focused on testimony from Fed Chairman Ben Bernanke.  Bernanke reaffirmed his support of the Fed's stimulus policy.  In his second day before congressional committees, Bernanke continued to defend the Fed's policy of buying bonds to keep interest rates low in order to promote growth and bring down the unemployment rate.  Look for the dollar to hold close to current levels, but potentially strengthen as the market looks for signs as to when the Fed may withdraw some of its monetary stimulus, as indicated by the minutes of the Fed's last policy meeting. 

EUR – The euro pushed higher after a better-than-expected Italian bond auction and after Economic and business confidence in the 17 country zone improved for the fourth straight month in February after consumer confidence released in the euro zone.  Although there was demand for Italian bonds, 10-year debt costs climbed over half a percentage point, raising some concerns over Europe’s third largest economy.  Economic sentiment in the euro zone rose by a better-than-expected 1.6 points to 91.1, while business morale increased by 0.36 points to a negative 0.73 level last seen in May.  Also released was Consumer confidence figures, which increased only slightly by 0.3 points.  Consumers, however, were more positive about the future of their economy.  Although the market saw some relief over the Italian bond auction, with another six months of instability in Italy possible, look for gains to be short lived as the euro tests its 100-day moving average of $1.3125.

GBP – Sterling gained ground against the dollar after a BOE policymaker dismissed talk of negative interest rates and with slightly better-than-expected UK growth figures.  BOE policymaker, Charles Bean said that any discussions about charging banks to deposit money at the central bank to encourage them to lend to firms was "blue-sky thinking."  The Office for National Statistics released revised growth figures for last year.  In 2012 the UK grew by 0.2 percent, up from the previous estimate of no growth. It is now thought the economy shrank by only 0.1% in the first quarter, compared with the 0.2% estimated, while growth in the third quarter was 1%, up from 0.9% estimated previously.  Although the numbers were positive overall the economy still contracted by 0.3 percent in the last quarter of 2012.  With a possible recession still on the table and on the heels of Moody’s recent down grade, look for the pound to continue to remain pressured potentially falling below 1.50.

JPY – The yen pushed higher enjoying the benefit of safe-haven status as traders remained cautious ahead of the Italian bond auction.  Despite this week's gains, the yen has weakened tremendously so far this year as investors bet on more aggressive policies from the Bank of Japan.  The market will continue to await the announcement of the new BOJ governor and the deputy post positions.  It is looking more and more likely that Haruhiko Kuroda who is currently the Asian Development Bank President and Kikuo Iwata will most likely take the deputy post.  Both candidates are known for aggressive monetary easing.  Look for the yen’s rebound to remain short lived as more monetary easing is expected from the BOJ, especially once the governor post is officially announced.  Look for USD/JPY to start to head higher, closer to 95 yen.

Commodity Currencies – The Canadian dollar slightly weakened against the USD as sluggish domestic data and recent negative sentiment over worries in Europe weighed on the currency.  The pressure in recent weeks followed a string of unexpectedly weak domestic data that pushed expectations for the BOC's next interest rate hike to as far as next year.  Analysts are now looking ahead to Canadian fourth quarter GDP data this Friday.  The Australian dollar slid further as disappointing fourth quarter construction fell 0.1 percent, as it makes up a large part of the GDP component. However, the market is highly anticipating tomorrow’s fourth quarter Capex data, where any sort of disappointment, under the 1.0 percent growth level, is likely to increase expectations for a rate cut at the Mar 5 meeting.

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