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• British Pound Recovers Lost Ground despite Deflation and Calls for an Increase in Stimulus
• Euro Balances Fading Investor Sentiment Against Currency's Risk Position
• New Zealand Dollar Bolstered by Retail Data, News RBNZ will Ease off on Stimulus

US Dollar Marks Yet another 14-Month Low as Risk Appetite Holds Its Bearings
If the dollar was able to find a foot hold and retrace some of its losses during this relatively stable period for risk trends; it would be reasonable to suggest the currency has pent up strength that could be unfurled on the first sign of a reversal in investor sentiment. However, the chop that we have seen so far has merely drawn the dollar closer to the next leg of its painful downtrend. In fact, a sharp plunge in the dollar through the European session (which just so happens to match up to a jump in equities) set another 14-month low for the greenback before the currency leveled. The congestion at such remarkable lows is reflective of the perilous level that some of the majors are trying to hold to. Most notably, EURUSD has surpassed its September 23rd swing high and now finds little (technically) to impede a trend that is ultimately targeting 1.60.

Yet, if the way has been cleared, why doesn't the dollar simply embark on the next leg of its trend? This can be partially attributed to the health of the currency itself and partially by risk appetite. Both of these fundamental facets have weighed heavily on the greenback this year; but there is always a level of equilibrium. To keep the depreciation going, the outlook for the must continue to trend out of dollar's favor - and just as surely, a reversal requires the fundamental trends to develop in the opposite direction. For event risk today, there were few notable economic releases. The Investor Business Daily economic sentiment report disappointed with the survey sliding below the 50 level for the first time in three months to 48.7. Both the economic outlook and personal financial forecast offered disappointing numbers and would weigh on the outlook for recovery would the data hold greater prominence among investment circles. More remarkable was the commentary on hand. The Fed's Donald Kohn spoke to a group on the economic outlook. The policy official said explicitly that he does not expect a V-shaped recovery and that inflation would not require progress on interest rate for some times. Indeed, these forecasts match what the market is pricing in. According to Fed Fund Futures, the probability that the central bank will return to a hawkish regime by December is a mere 4.2 percent. These probabilities increase substantially after the turn of the year. However, it is important to note that the dollar can still shake its funding status (a major burden for the currency) without resorting to rate hikes. Should market-based rates improve and draw investor capital on their own, the US will be in much the same position as many of its counterparts. Currently, the three-month labor is holding at 0.28438 percent - a discount to its Japanese counterpart but now a premium to the Swiss rate.

Looking ahead to tomorrow, we will once again be distracted by more traditional fundamental influences. For volatility, the advance retail sales data for September is top billing. Following the biggest surge in the headline figure since January of 2006 with the last reading, it is generally expected that the reading will swing back the other way with a notable 2.1 percent contraction - what would be the biggest drop this year. This dour turn is based on the expiration of the ‘cash-for-clunkers' program which was more than a small contributor to the August reading. It will be the ex-autos data that holds the greater influence over the outlook for fundamental health. Among the other notable releases to follow are the import price index (a prelude to the consumer-based figures); mortgage applications (which hit a May high in the previous week's reading); and the FOMC minutes from the September 23rd decision.

British Pound Recovers Lost Ground despite Deflation and Calls for an Increase in Stimulus

Despite a mixed (and decidedly bearish leaning) batch of economic data from the UK today, the British pound was still able to manage a bullish close. The strong economic data for the day was released early in the Asian session. The BRC Retail Sales Monitor and RICS House Price Balance are both proprietary indicators; but they nonetheless enjoy considerable influence over speculative interest through their pertinent and timely measures. The retail sales gauge for September reported a 4.9 percent increase in total store sales through year-over-year for the best performance in five months. The housing report for the same month echoed the positive winds behind the economy with a net 22 percent of the survey's respondents reporting rising prices - the best reading since April of 2007. Alone, these two measures would paint a promising picture for currency traders; but it was the inflation data that was most pressing. The Office for National Statistics reported the consumer basket index slumped further than expected through September to a 1.1 percent annual rate. This matches the most lax pace since September of 2002. Without price pressures developing over the next few months, there is little chance that the MPC will act to increase rates as growth is certainly no concern. Adding to the gloomy rate forecast, the British Chamber of Commerce had also released its assessment. The group said it was unlikely that the economy grew through the third quarter and the central bank should consider increasing its bond purchasing programme up to an additional 200 billion pounds to facilitate the recovery. We will have to see if the BoE heads the BCC's recommendations going forward.

Euro Balances Fading Investor Sentiment against Currency's Risk Position
Risk appetite would prop the euro up against its low yielding (and even some of its high yielding) counterparts; but the currency would find little fundamental support on its own through Tuesday's session. The only market-worthy data scheduled for release was the ZEW investor sentiment surveys for October. Naturally, the steady advance in the capital markets led economists to believe the confidence gauges would extend their advance from the multi-year lows set late last year; but reality seems to be setting in for market participants. The economic sentiment reading from German pulled back for the first time in three months from its three-and-a half year high. This tempered reading was to come sooner or later as speculation for economic activity (and subsequently expected returns) was running well beyond what was feasible given the prospects for growth. We will have to see whether this sentiment gauge is a prelude to investors' actual trading habits.

New Zealand Dollar Bolstered by Retail Data, News RBNZ will Ease off on Stimulus
The New Zealand dollar has comfortably followed in the wake of its Australian counterpart by rallying along with risk appetite; but until now most the behind-the-scenes fundamentals left much to be desired. Yet this week, data and announcements finally offer evidence that the support growth and the eventual turn in the RBNZ interest rate bias. For event risk, August retail sales jumped 1.1 percent, the most since November of 2007 for a tangible foothold for growth. Hitting a similar pitch, the REINZ home sales figure for September came in just under its record high reading (going back little more than five years). The real take away from the day though was the central bank's statement that it would remove some of its temporary crisis liquidity facilities. This is a far from that heavily-anticipated rate hike; but it is a definitive step in that direction.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com