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•US Dollar Support Firms on Morgan Stanley Disappointment, Housing Data
•British Pound Recovers From Signs of a Crumbling Industrial Sector with BoE Minutes
•Australian Dollar Outlook Complicated by Inflation Data
•Japanese Yen Traders Will Have to Monitor The Safe Haven Aspect of Their Favorite Currency


US Dollar Support Firms on Morgan Stanley Disappointment, Housing Data

Risk appetite was still in control of the underlying fundamental currents in the Forex market Wednesday. Up until the beginning of this week, this guidance was the fuel for volatility; but as we can see from today's price action, it can also be the impetus for congestion and dampened volatility. The dollar has cut tight ranges against its primary counterparts; yet it does so at the very edge of a technical cliff. EURUSD is a little more than 100 points away from forging new highs for the year, GBPUSD is steadily trending higher towards the closely watched 1.60 level and NZDUSD has even managed to climb to highs not seen since October. By all accounts, this is a situation where the market is holding its collective breath, waiting for a catalyst to decide whether we will take that next step towards new highs or see sentiment fall take a dramatic reversal.

Still very much the product of market optimism, the dollar found earnings were shifting the balance of power back towards risk aversion. Among the notable releases for the day were four Stress Test banks including: Morgan Stanley, Wells Fargo, Bank of New York and US Bancorp. Using the consensus forecast as a benchmark, US Bancorp and Wells Fargo would both beat expectations. However, the general view of the sector was one that called up significant problems later down the line. Both Morgan Stanley and Wells Fargo reported significant losses associated with bad debts and commercial loans. This is an obvious area of contention recently as CIT struggles to stay afloat. And, speaking of this highly-publicized firm, the most recent market commentary suggests advisors to those bondholders that raised a rescue this week are recommending a restructuring through bankruptcy next month. Looking ahead to tomorrow, there will be another round of TARP bank (Capital One, Fifth Third, PNC Financial) and blue chip (Microsoft, AT&T, McDonald's) to take watch. After this series, however, the numbers taper off dramatically; which means we could be looking at the last chance for second quarter earnings to define the broader market trend.

From the data front, the economic docket was as light as it has been all week. Housing activity came into focus with MBA mortgage applications for the week ending July 17th and an FHFA inflation report. According to the report, home prices rose 0.9 percent through the month of May - matching the fastest pace since September of 2005. At the same time, year over year, sector-specific inflation is down 5.6 percent. A slow recovery in home values reflects a sluggish recovery in consumer wealth; yet it also helps facilitate a contraction in inventories which is a vital first step to a genuine turn for the sector. We will see how encouraging lower prices actually are tomorrow when the NAR releases its report of June existing home sales tomorrow. Other notable events include weekly jobless claims and the Fed member Tarullo's testimony on systemic risk in the Senate.

Related Article: Is the Market Moving Influence of Earnings on the Dollar Fading?


British Pound Recovers From Signs of a Crumbling Industrial Sector with BoE Minutes

The British pound was arguably the most volatile currency of the day. This was due to two contrasting pieces of economic data fighting for control over the currency's direction. Most fundamental traders were looking to the minutes from the Bank of England's last policy decision to bolster activity. While the MPC's decision to hold the benchmark lending rate unchanged at 0.50 percent at its July 9th gathering was fully expected, most commentators and traders were surprised that the 125 billion pound asset-purchasing program was not increased. In fact, the decision to maintain the pace of quantitative easing was unanimous. Speculators take this as a sign that the BoE is looking to end its stimulus efforts and the next move will be to remove some liquidity from the market. Whether this is a reasonable move is debatable; but it bolsters the perception of the market and economy's recovery. In contrast, the CBI's industrial trends report was firmly set against any near-term rebound in economic activity. The proprietary factory activity gauge reported the worst outlook reading for orders since the beginning of 1992. With retail sales and mortgage applications data due tomorrow, we will have a full account on the health of the economy to formulate our last-minute forecasts for the 2Q GDP readings due Friday.

Related Article: Can Retail Sales Alter 2Q Growth Forecasts Before Friday's GDP Release?


Australian Dollar Outlook Complicated by Inflation Data

Simple economic indicators no longer offer a straightforward impact on price action. Point-in-case, the Australian 2Q CPI data has many facets to it. The headline inflation reading reported a 0.5 percent rise in the consumer product price basket and 1.5 percent annual pace of growth (both in line with expectations). On the one hand, inflation is below the central bank's 2 to 3 percent target band. This could be used to argue that case to perhaps front run a further downturn in economic activity for Australia through the rest of the year. However, the RBA can also point to a core figure running at a 3.6 percent annual rate and positive price growth for the headline through the three-month period. Considering the central bank has voted to hold its benchmark unchanged at 3.00 for consecutive meetings, the influence will likely come through the latter.

Japanese Yen Traders Will Have to Monitor the Safe Haven Aspect of Their Favorite Currency

What are the qualities of a safe haven currency? The Japanese yen has long been considered such a staple and has seen this role only intensified over the past six months. However, in these times of uncertainty, Japan is certainly suffering as much as any of its major counterparts. More importantly to speculators, the prospects for recovery are severely restrained for the second largest economy in the world. The long swatch of global growth before and after the doc-com bubble has been called a ‘lost decade' for the island nation as deflation and credit troubles plagued its markets. Today, a quarterly survey from the BoJ reported business and consumer loans dropped through 2Q - the latter to its lowest level on record. With debt already at 170 percent of GDP and a market struggling to absorb the overabundance of government debt to fund the burgeoning policy packages; the outlook for a Japan is looking rather dour.

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