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- British Pound Dives as BOE Minutes Show Potential for Expanded QE Later in the Year
- Euro Rallies for Test of 1.4250 Despite Record Drop in German Producer Prices
- Canadian Dollar Mostly Stronger Despite Weak CPI Results
US Dollar, Japanese Yen Diverge in Choppy Trade, Though This May Not Last
The US dollar and Japanese yen were mixed on Wednesday, with the greenback falling against most of the majors and the yen holding on to most of its gains. In reality, the moves marked more of a consolidation than anything else as no major support/resistance levels were broken. Looking to the DXY index, though we did see a bit of a trendline break, a range formation offers additional support for the US dollar. Meanwhile, the JPY crosses remained below key supporting trendlines, which now offer resistance, while bearish formations in pairs like GBPJPY and NZDJPY suggest further declines are in store.
Now, this is a repeat from yesterday, but there is evidence that risky assets could take a heavy hit in the near-term. DailyFX Technical Strategist Jamie Saettele noted on the DailyFX Forex Stream on Tuesday that trading volume in stocks this week has been at its lowest since the last three major holidays: ahead of the US Independence Day holiday, the days before and after Christmas, and the day after the US Thanksgiving Day holiday, suggesting the increase will not last. Indeed, meaningful rallies typically occur only with higher trading volumes. Second, investor optimism may have hit an extreme, as evidenced by the trumpeting of a headline like Why the ‘Carry Trade' is Back in a major media publication (the Wall Street Journal). We also need to cite the August 2009 issue of Futures Magazine, which shows a bull in the mist. Third, on Monday the Federal Reserve's Senior Loan Officer Survey showed that banks tightened lending in Q2 due to a more uncertain economic outlook, suggesting that credit conditions are nowhere near normal and adding to evidence that the financial sector could continue to lead the US stock market on a gradual decline. Given all of these signs of an important turn lower in equities and FX carry trades, there looks to be great upside potential for safe haven currencies like the US dollar and Japanese yen in coming weeks.
Event risk should be fairly low on Thursday, with only the Conference Board's US leading economic index and the Philadelphia Fed's manufacturing index. The leading index is forecasted to rise by 0.6 percent for the month of July, which will likely be due primarily to the rally in equities during that period. Meanwhile, the Philadelphia Fed's index is projected to edge up to -2 for the month of August from -7.5, but based on Monday's surprisingly strong Empire manufacturing index, the results could beat expectations.
British Pound Dives as BOE Minutes Show Potential for Expanded QE Later in the Year
The minutes from the Bank of England's August 6 rate decision didn't reveal much in the way of new outlooks, but they did highlight one nugget of information that sent the British pound tumbling, though the currency eventually recouped some of the losses later in the day. According to the minutes, the Monetary Policy Committee said that there were arguments in favour of a considerable expansion of the BOE's quantitative easing program, but at the same time, there were also arguments for a more moderate expansion...given that some of the most immediate downside risks to the economy seemed to have receded. Ultimately, six members of the MPC voted in favor of the implemented proposition to increase the size of the Asset Purchase Facility by £50 billion to a total of £175 billion, but three members, including BOE Governor Mervyn King, dissented in favor of a £75 billion increase. King's vote suggests that there is potential for the BOE to expand the program even further down the line, and adds to downside risks for the British pound in coming months.
On Thursday, UK retail sales will hit the wires and according to Bloomberg News, the results could reflect a 0.4 percent increase for the month of July. While the BOE has said in the past that they prefer to focus on private surveys rather than this volatile index, surprisingly strong or weak numbers could shake up the British pound. European session traders should be sure to check outDailyFX Analyst David Song's live analysis and trading of the UK retail sales release, starting at 4:15 ET on Thursday.
Related Article: British Pound Weekly Trading Forecast
Euro Rallies for Test of 1.4250 Despite Record Drop in German Producer Prices
The euro rallied for a test of trendline resistance at 1.4250 vs. the US dollar during the New York trading session after European trading saw the currency drop. Indeed, the release of the German producer price index put the euro under pressure, initially, as the report showed that prices plunged 7.8 percent in July from a year earlier, the steepest decline since recordkeeping began in 1949. That said, the lower prices were primarily the result of weaker oil costs, and the European Central Bank has been keen to brush off the impact of the volatile commodity on overall inflation, suggesting the data won't necessarily impact the ECB's policy stance.
Canadian Dollar Mostly Stronger Despite Weak CPI Results
The Canadian dollar ended the day up against the majors, for the most part, despite the fact that inflation in Canada cooled more than anticipated in July. The consumer price index (CPI) for the nation fell 0.3 percent during the month of July, bringing the annual rate of growth down to -0.9 percent, the lowest since 1953. Furthermore, the Bank of Canada's core measure went unchanged during the month and unexpectedly brought the annual rate of growth down to 1.8 percent from 1.9 percent. The data will only add to concerns that deflation could eventually become a risk for the economy, though still fairly robust core CPI suggests the central bank will not become more aggressively dovish anytime soon.
Related Article: Canadian Dollar Weekly Trading Forecast
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SUPPORT AND RESISTANCE
Written by: Terri Belkas, Currency Strategist for DailyFX.com