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• British Pound Gains as BOE Minutes Reflect Emerging Optimism on UK Economy
• Euro Mixed After Services PMI Signals Expansion for First Time Since May 2008
• New Zealand Dollar Maintains Strength Following Q2 GDP Results - Exports May Fall to Lowes Since January 2008

US Dollar Down Following Federal Reserve Statement - NAR Existing Home Sales May Hit 2-Year High
The release of the Federal Reserve's latest policy statement led to a sharp spike lower in the US dollar, as the central bank maintained a neutral tone and repeated that they would keep rates exceptionally low for an extended period. Nevertheless, the overall sentiment of the statement was optimistic, as the FOMC said that economic activity had picked up while conditions in the financial markets have improved further and that activity in the housing sector has increased. The FOMC also noted that household spending appears to be stabilizing, but that consumers still face serious headwinds from ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

As far as quantitative easing goes, the central bank maintained that they would purchase a total of $1.25 trillion of agency mortgage-backed securities (MBS) and up to $200 billion of agency debt, which should be completed by the end of Q1 2010, while their purchases of $300 billion in Treasury securities will be completed by the end of October 2009.

The FX market's response to the news was very choppy, as usual, with the US dollar spiking lower against the euro and Japanese yen. This prevented the JPY crosses from following the US stock markets higher, as both the S&P 500 and DJIA broke to fresh 2009 highs within 15 minutes of the news. Once price action settles down, the news may ultimately bode best for FX carry trades as Asian session traders may see the policy statement as an indication of better prospects for global growth going forward. When it comes to pairs like EUR/USD, though, moves may be retraced.

On Thursday, the National Association of Realtors is anticipated to report that US existing home sales rose 2.1 percent in August to an annual rate of 5.35 million, which would mark the fifth straight increase and a nearly two-year high. The data would also be in line with last week's release of US housing starts, as the annual rate rose 1.5 percent to a nine-month high of 598,000 in August. As we've noted in the past, the combination of lower home values along with the government's efforts to boost demand via tax rebates of up to $8,000 on new purchases should remain supportive for the sector through the end of the year. However, since the tax program expires on December 1, and after that, it will be important to see how the housing market fares without the government's stimulus.

Related Articles: Dollar Bear Boat Too Full, US Dollar to Face Fed Decision, New Zealand Dollar Strength Hinges Upon Q2 GDP

British Pound Gains as BOE Minutes Reflect Emerging Optimism on UK Economy

The British pound rallied following the release of the minutes from the Bank of England's last meeting on September 9-10, as it indicated that all of the Monetary Policy Committee members voted to leave policy unchanged, including the dissenters from that August meeting who voted in favor of a larger expansion to their quantitative easing program. At the same time, the former dissenters, including BOE Governor Mervyn King, thought that a larger asset purchase program could still be justified. Overall, though, the MPC's tone was a bit more optimistic as some indicators have suggested that growth in the second half of this year was likely to be positive and the probability of inflation falling below 1 percent in the coming months had declined since the August Inflation Report, which helps to explains the British pound's broad strength. As we've mentioned in the past, though, the UK's widening fiscal deficits could continue to exert bearish pressures on the British pound in the future as they endanger the nation's AAA credit rating.

Euro Mixed After Services PMI Signals Expansion for First Time Since May 2008

Euro-zone services PMI finally breached 50 - the point of neutrality - to indicate expansion in the sector for the first time since May 2008, as the index rose to 50.6 in September from 49.9. Manufacturing PMI, however, only rose to 49.0 in September from 48.2, marking the sixteenth straight period of contraction in business activity. The data suggests that consumption, rather than export demand, is paving the way for recovery in the region.

Looking ahead to Thursday, a steady rally in European equities though July and September to the highest levels since October 2008 along with indications of burgeoning economic growth in Germany is likely to underpin the case for a rise in German business sentiment for the month of September. The IFO survey on the business climate is projected to rise to a one-year high of 92.0 from 90.5, led by rising expectations and mild increases in sentiment on currency conditions. Surprisingly strong results could lead the euro to gain following the news on a very short-term basis, but disappointing data would likely have a greater impact, and could trigger sharp declines in the currency.

New Zealand Dollar Maintains Strength Following Q2 GDP Results - Exports May Fall to Lowest Since January 2008

The New Zealand dollar was the strongest major currency on Wednesday after rallying overnight following the better-than-expected Q2 GDP results. Overnight, data is projected to show that the New Zealand trade deficit widened to NZ$329 million in the month of August from NZ$163 million, and this is likely to be due primarily to a rise in imports to NZ$3.45 billion from NZ$3.34 billion. Indeed, the latest GDP results for the nation showed that consumption helped lift the economy out of recession, but this increase in demand has been to the detriment of the trade balance. This is especially so since the New Zealand dollar has spiraled higher in recent months, cooling foreign demand for New Zealand-made exports. In fact, exports are projected to fall to NZ$3.1 billion, the lowest since January 2008, from NZ$3.18 billion. If the New Zealand trade deficit widens in line with or more than expectations, NZDUSD could pull back further from the pair's Asian session high of 0.7311.

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Written by: Terri Belkas, Currency Strategist for