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• Euro Breaks Below Support Despite Rise in German Business Confidence
• British Pound Breaks Down vs. US Dollar, Outlook for GBP/JPY Looks Bleak
• New Zealand Dollar Down Ahead of NZ Trade Results

US Dollar Rallies as Durable Goods Orders Surge, Japanese Yen Gains on Uneasy Risk Appetite
For the second day in a row, surprisingly strong US data did little to spur risk appetite as investor optimism has been exhausted. That said, the US dollar did show a positive reaction to the news, suggesting that fundamentals may start to play a greater role in price action for the currency. Indeed, US durable goods orders surged 4.9 percent in July, the biggest rise in two years, as the ultra-volatile non-defense aircraft component jumped by 107.2 percent as Boeing orders doubled in July to 44 from 20. However, durable goods orders excluding transportation only rose 0.8 percent, and non-defense capital goods orders excluding aircraft - a gauge of business investment - actually fell for the first time since April, suggesting that this surprisingly strong number is a misleading sign of growth.

Adding to the mix, US new home sales rose for the fourth straight month in July, this time by 9.6 percent, the sharpest increase since February 2005, to a ten-month high of 433,000. A further breakdown shows that supply levels fell to 7.5 months from 8.5 months as median prices fell slightly from the previous month to $210,100, though values are still down 11.5 percent from a year ago. In coming months, there is potential for sales to remain supported by lower prices and the US government's first-time home buyer tax credit of up to $8,000. However, the program expires on December 1, and with unemployment rates likely to rise further, a significant downdraft could hit the sector once again.

The second round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see revisions. The preliminary reading is forecasted to be revised down to -1.4 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Readings in line with expectations may not have a very big impact on price action, but better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2. On the flip side, surprisingly weak numbers could crush these hopes and trigger the return of risk aversion.

Related Articles: FX Carry Trade Direction Hinges Upon Proof of Global Economic Recovery, US Dollar Weekly Trading Forecast

Euro Breaks Below Support Despite Rise in German Business Confidence
The euro initially jumped this morning following the release of the German IFO business confidence survey, but subsequently dove on broad US dollar demand. The IFO index rose to 90.5 in August from 87.4, marking the fifth consecutive increase and beating expectations for a rise to 89. It looks like the steep rally in equities in July along with Germany's 85 billion euro stimulus package has helped to boost sentiment. However, with the growth seen in Q2 anticipated to moderate later in the year, sentiment may follow suit. Looking to EURUSD, the pair broke below support and former resistance at 1.4260, and though solid support has come into play at 1.4210, the ability of the DXY index to hold above a key trendline connecting the July 2008 and August 2009 lows indicates that the greenback remains within an uptrend.

Related Article: Euro Weekly Trading Forecast

British Pound Breaks Down vs. US Dollar, Outlook for GBP/JPY Looks Bleak

The British pound remained one of the weakest major currencies as GBPUSD broke below a rising trendline connecting the June and July lows, leaving the door open to further declines. Meanwhile, GBPJPY also experienced a steep drop, but failed to break below the July 17 and July 22 lows of 152.31/39, but based on the GBPUSD decline, there is potential for the JPY cross to follow suit. As mentioned in recent days, 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.

Related Article:
British Pound Weekly Trading Forecast

New Zealand Dollar Down Ahead of NZ Trade Results

According to forecasts published by Bloomberg News, the New Zealand trade deficit is projected to have narrowed during July to NZ$150 million from NZ$417 million due primarily to a drop in imports. In fact, imports are anticipated to slow to NZ$3.3 billion from NZ$3.62 billion, while exports are projected to slip to NZ$3.15 billion from NZ$3.2 billion. With the recent improvements in the New Zealand economy, imports have held up rather well, which has been the main driver of the drop in the trade balance last month. However, a further decline in exports will hurt the case for a global economic recovery, and thus, a New Zealand economic recovery. Overall, a surprise widening of the trade deficit should impact the New Zealand dollar the most, and could lead pairs like NZDUSD and NZDJPY lower.

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