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- British Pound Could Gain if BOE Does Not Expand QE Program
- Euro Remains Range-Bound vs. Swiss Franc - SNB Intervention Risk Looms
- Australian Dollar Tumbles Ahead of Labor Market Reports Overnight
Japanese Yen Breaks Higher, US Dollar Gains Slightly - What Happened?
The Japanese yen broke more than 2 percent higher against the majors, with as pairs like USDJPY, EURJPY, and GBPJPY (among others) broke below key support levels, suggesting we've witnessed medium-term turns in the JPY crosses. The moves were initially triggered by a drop in the S&P 500, which serves as another gauge of market-wide risk appetite, below the neckline of a head and shoulders pattern at 880. However, the S&P ultimately closed -0.17 percent at 879.56, signaling that the drop we saw intraday to 869.32 was just a false break. Indeed, for what it's worth, the safe haven US dollar's gains were marginal, adding to evidence that the pervasive risk aversion that we've seen in the past isn't on hand. Given the extent of the moves we saw in carry trades today, Thursday may simply be a day of consolidation for the majors.
There was little in the way of major US economic releases, though the Federal Reserve did report that consumer credit fell for the fifth straight month in May by $3.2 billion in May, suggesting that both the supply and demand for credit remains low. As we've said in the past, the mentality of credit card fueled spending on discretionary items is now a thing of the past, which will hurt retailers and consumption growth in the long-run.
While there are no major US economic indicators due out on Thursday, there will be lingering event risk stemming from the Group of Eight (G8) meeting, which will extend through July 10. According to a program outline on the G8 Summit site, participating government leaders will discuss development policies, futures sources of growth, and the impact of the crisis on Africa. In between all of these meetings, there will also be a variety of press conferences, leaving ample room open for market-moving commentary.
British Pound Could Gain if BOE Does Not Expand QE Program
The British pound was one of the weakest major currencies, which has been somewhat of a trend over the past few days as speculation about the outcome of Thursday's Bank of England meeting builds. Today, Lloyds Banking Group's UK Halifax house price index said that home prices unexpectedly fell by 0.5 percent in June to an average value of 157,713 pounds. The decline is in line with the drop we saw in Rightmove's June results, and suggests that the UK housing market remains on uneven ground.
Looking ahead to Thursday at 7:00 ET, the BOE is expected to leave rates unchanged for the fourth straight month at an all-time low of 0.50 percent. The central bank's last policy statement essentially signaled a neutral stance, as no expansions to their quantitative easing (QE) program have been revealed. That said, the final reading of Q1 GDP for the UK was unexpectedly revised down to an annual rate of -4.9 percent, the lowest since record keeping began in 1956, from -4.1 percent. This leaves GDP at the bottom of the BOE's previous range of forecasts, and may push them to consider increasing the scope of their QE program, and signs that this is occurring within the BOE's policy statement on Thursday could weigh heavily on the British pound. However, the British pound's recent declines may signal that the markets are already pricing in a QE expansion, and if the BOE fails to go this route, the currency could actually rally in response.
Related Article: British Pound Weekly Trading Forecast
Euro Remains Range-Bound vs. Swiss Franc - SNB Intervention Risk Looms
The Swiss franc initially fell against the majors after the Swiss State Secretariat for Economic Affairs said that the nation's unemployment rate jumped to a four-year high of 3.8 percent (seasonally adjusted) in June, from 3.5 percent. The data suggests that the recessions plaguing the economies of the Euro-zone, Switzerland's biggest trade partner, is hurting Swiss businesses, and rising layoffs will ultimately impact domestic demand as well. Meanwhile, the euro was also a laggard for the most part, as the annual rate of Euro-zone GDP growth for Q1 was revised down to record low of -4.9 percent from -4.8 percent as investment fell 4.1 percent and exports plummeted 8.8 percent. However, timelier signs of export demand have shown slight signs of improvement as the German Economic Ministry said that industrial output surged 3.7 percent in May, the biggest monthly increase in 16 years, while the annual rate rose from its record low of -22.3 percent up to -17.9 percent. That said, more than one month's worth of data will be needed before we can say that European trade has improved.
All told, EUR/CHF remains within an intraday falling channel formation, with support now at 1.5125 and resistance at 1.5200. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they continue to consider interventions to prevent an excessive rise in the Swiss franc. As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.
Australian Dollar Tumbles Ahead of Labor Market Reports Overnight
The Australian dollar was hit hard due to the sharp drops we saw in FX carry trades, and the currency will face event risk overnight. The Australian labor markets started to deteriorate during the second half of 2008, and this is likely to continue through 2009. While we did see a surprise improvement in April, the June results are projected to show that the unemployment rate jumped up to a nearly 6-year high of 5.9 percent from 5.7 percent while the net employment change is anticipated to fall by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 21:30 EDT.
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Written by Terri Belkas, Currency Strategist of DailyFX.com