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• British Pound, Euro Fall Across the Majors as Risk Trends Drive Price Action
• Australian Dollar Up as RBA Stevens Says Interest Rate Have ‘Probably' Bottomed
• New Zealand Dollar Holds Up Ahead of RBNZ Rate Decision - What to Look For



US Dollar, Japanese Yen Gain as Disappointing US Consumer Confidence Shakes Risk Appetite

The US dollar ended Tuesday mixed, but the Japanese yen was the strongest of the majors as the S&P 500 was unable to break Monday's highs and closed down 2.56 points at 979.62. Looking to the day's data, the Conference Board's index of US consumer confidence fell more than expected for the second straight month in July to 46.6 from 49.3. A breakdown of the report indicates that weak labor market conditions are the primary reason for the decline, as consumers thought that employment was increasingly hard to get and that conditions would remain this way over the next 6 months. Furthermore, additional people anticipated that their income would decrease during the next 6 months, boding especially ill for consumption growth. Meanwhile, inflation expectations for the next 12 months have fallen to 5.5 percent from 5.9 percent, the lowest since February 2008.

On the other hand, the S&P/Case-Shiller US house price index rose 0.45 percent in May, the first increase in nearly three years, adding to the variety of positive housing market reports we've seen lately. Also, the Federal Reserve Bank of Richmond's measure of manufacturing sector activity jumped to a nearly 2-year high of 14 in July from 6. The increase was much larger than anticipated, as new order volume rocketed to the highest level since March 2004. However, the sharp improvement in manufacturing conditions was really only contained to the Richmond Fed region in July, as both the Philadelphia Fed and Empire (NY) manufacturing indices remained negative during the period.

Wednesday's release of US durable goods orders is projected to show a 0.6 percent decline in June following a 1.8 percent jump in May, and excluding transportation the index is forecasted to stagnate. While the headline result will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. This component surprisingly rose in May, and a continuation of this dynamic would be supportive of outlooks for a slow recovery in the US economy.

Related Article: US Dollar Weekly Trading Forecast, JPY Driven by Risk Trends, Threat of Political Instability Looms

Euro, British Pound Fall Across the Majors as Risk Trends Drive Price Action

The euro and the British pound were the laggards of the day as there was no data on hand and demand for the Japanese yen rose amidst lingering risk aversion. Indeed, both EUR/JPY and GBP/JPY broke below intraday rising trendline support, suggesting further decline could be in store. Meanwhile, the US dollar remains very range bound, as the DXY index consolidates between 78.35-79.05. Ultimately, this means that EUR/USD and GBP/USD remain quite range bound as well, with the former holding to 1.4150-1.4300 and the latter holding to 1.6400-1.6550. With few market-moving releases due to hit the wires through the remainder of the week, price action for EUR/USD, EUR/JPY, GBP/USD, and GBP/JPY may have more to do with risk trends than anything else.

Related Articles: Euro Weekly Trading Forecast, British Pound Link to Carry Trades Best Explained by Interest Rate Expectations

Australian Dollar Up as RBA Stevens Says Interest Rate Have ‘Probably' Bottomed

The Australian dollar was the second strongest of the majors as Reserve Bank of Australia Governor Glenn Stevens issued hawkish comments. Stevens said that Australian interest rates had probably bottomed and dismissed the notion that rising unemployment would lead the RBA to cut rates further, noting that the deterioration of the labor markets had been slower than previously feared. Following these statements, Credit Suisse overnight index swaps (OIS) shifted to price in 112 basis points worth of rate increases by the RBA over the next 12 months, compared to 98 basis points yesterday and 63 basis points a month ago. These moves will only make the Australian dollar stronger during times of strong risk appetite, but arguably weaker during bouts of risk aversion.

New Zealand Dollar Holds Up Ahead of RBNZ Rate Decision - What to Look For

The New Zealand dollar ended the day up against most of the majors, with the exception of the Australian dollar and Japanese yen. The currency showed only a very short-term reaction to the release of New Zealand's trade balance, which unexpectedly posted a deficit of NZ$417 million during the month of June, bringing the annual deficit to NZ$3.176 billion, as exports plunged 19.3 percent and imports jumped 18.3 percent. However, the increase in imports was due almost entirely to a one-time boost from Jetstar Airways, which bought aircraft in order to start a new service.

Despite these lingering signs of economic slowdown, the Reserve Bank of New Zealand (RBNZ) is still anticipated to leave the Official Cash Rate target unchanged for the second straight meeting at 2.50 percent. In RBNZ Governor Alan Bollard's last policy statement, he said that there was evidence that international economic activity is stabilizing and international financial conditions are improving. However, these comments were some of the only confident ones, as he went on to focus on downside risks to activity and inflation, with the appreciation of the New Zealand dollar creating an unhelpful tension with their projections. A reiteration of these talking points within the upcoming policy statement could push the New Zealand dollar higher once again. However, the currency could pull back if the central bank sounds more cautious on growth prospects and leaves the door open once again to modest reductions in coming quarters, as they've said in the past that they expect to keep the OCR at or below the current level through the latter part of 2010.

Related Article: Will the RBNZ Rate Decision Break NZDUSD From Its Short-Term Range?

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