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• Euro Gives Up Early Gains as German Q2 GDP Shows Further Contraction in Domestic Demand
• British Pound Threatens to Break Key Support Levels vs. US Dollar, Japanese Yen
• Swiss Franc Rises Despite Disappointing Economic News

US Dollar, Japanese Yen Showing Signs of a Turn as Surge in Consumer Confidence Fails to Impress
To say it was an interesting day in the currency markets would be an understatement. The US dollar and the Japanese yen ended as the strongest of the majors, but they were well on their way to be the weakest during the European and early US trading session. Indeed, ahead of the release of US consumer confidence, carry trades were making headway and US stock market futures were rising in anticipation of strong results. In the end, the markets were correct in anticipating better results, but wrong on the subsequent fallout. In fact, shortly after the Conference Board announced that their measure of US consumer confidence jumped to a three month high of 54.1 from a revised 47.4, US stocks started to pullback from intraday highs, and the US dollar and Japanese yen rallied. These moves may suggest that optimism has hit an extreme, and with the DXY index holding above a trendline connecting the July 2008 and August 2009 lows, and many of the JPY crosses showing signs of reversal, we may be finally nearing the return of risk aversion. That said, I was beating this drum last week and got burned as a result, so I'll be awaiting confirmation signals (such as trendline and neckline breaks in pairs like GBPUSD, GBPJPY, and EURJPY) before taking decisive action.

Taking a closer look to Tuesday's data, a breakdown of the consumer confidence report shows that the increase was due primarily to surge in consumer expectations, as this component rose to 73.5, the highest since December 2007, from 63.4. The index gauging sentiment on the present situation, however, was not as optimistic, as this component edged up to 24.9 from 23.3, leaving it near the same levels we've seen all year. What does this tell us? It suggests that consumers have been buying in to the cheerleading perpetuated by government and central bank officials, but they haven't seen any sort of economic improvement in their own lives.

On Wednesday, US durable goods orders is projected to show a 3.0 percent increase in July following a 2.5 percent drop in June, but excluding transportation the index is forecasted to only rise by 0.8 percent. 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 has improved over the past two months, and a continuation of this dynamic would be supportive of outlooks for a slow and steady recovery in the US economy.

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Euro Gives Up Early Gains as German Q2 GDP Shows Further Contraction in Domestic Demand

The euro saw a very choppy day of price action, falling upon the final German GDP release, rallying at the start of the US trading session, and finally pulling back at the end of the US trading session as risky assets all took a hit. Looking to the data on hand, Q2 GDP was confirmed at +0.3 percent from the previous quarter, marking the first expansion in five quarters, while the annual rate of GDP growth posted at -5.9 percent after being adjusted for the number of working days. The report reflected a 0.7 percent rise in private consumption, while construction investments increased 1.4 percent from the first quarter, missing forecasts for a 2.0 percent rise. Meanwhile, domestic demand took a hit, tumbling 1.3 percent, while imports plunged 5.1 percent and exports slipped 1.2 percent. Overall, 85 billion euro stimulus plan implemented by the German government seems to have had its intended effect, but whether this growth can be sustained is questionable, as European Central Bank President Jean-Claude Trichet sees a very bumpy road ahead.

Related Article: Euro Weekly Trading Forecast

British Pound Threatens to Break Key Support Levels vs. US Dollar, Japanese Yen

The British pound remains one of the weakest major currencies, and pairs like GBPUSD and GBPJPY are nearing critical support levels. GBPUSD ended Tuesday just above a rising trendline connecting the June and July lows at roughly 1.6330, as well as the neckline of a head-and-shoulders pattern near 1.6300. GBPJPY also ended the day just above the neckline of a head-and-shoulders pattern at 153.50. All told, the macroeconomic outlook for the nation remains bleak, especially after traders learned last week that the UK government posted a deficit of 8 billion pounds in July, the biggest since recordkeeping began in 1993, highlighting the dour state of the nation's finances. Standard & Poor's lowered its outlook on the UK's AAA credit rating to negative from stable in May for this very reason, and if we see this trend continue, the risk for an actual downgrade will grow and put greater pressure on the British pound. Realistically, we could see a breakdown in GBPUSD and GBPJPY very soon.

Related Article: British Pound Weekly Trading Forecast

Swiss Franc Rises Despite Disappointing Economic News
The Swiss franc joined the US dollar and the Japanese yen as being one of the strongest major currencies on Tuesday, but the moves had more to do with lingering risk aversion that economic data. This morning, the UBS Swiss consumption indicator slipped to 0.766 in July from a revised reading of 0.951. At the same time, payrolls slumped 0.4 percent in Q2 to an annual rate of 3.945M, indicating that mounting job losses are leading consumer to scale back spending, all of which puts the chances of a Swiss economic recovery in danger. Furthermore, the data suggests that the Swiss National Bank will keep rates at ultra-low levels and may continue to utilize policy tools beyond the interest rate in order to steer the ailing economy out of the recession and to prevent deflation, which could ultimately include intervention in EURCHF.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com