US Dollar strength hangs on Q4 GDP and FOMC Decision releases this week

As expected, The UK was confirmed last week as being officially in recession. The severity of the slowdown took the market by surprise. Shrinking by 1.5% in the last quarter of 2008, the consequent sell off for the Pound was sharp. GBP/USD fell to just above 1.3500, a 23 year low, while EUR/GBP rose to 0.9470.

 

The USD and JPY continued to gain ground as investors searched for quality, though, by the end of the day, the Dollar had given back much of it’s gains thanks to expectations of a ‘spat’ between the US and China following Geithner’s comments about Chinese currency manipulation.

Also helping to keep the Dollar suppressed was the sharp rise in commodity prices with gold up to $900 an ounce and oil rising by almost $3 over the day.

 

Elsewhere, New Zealand's services industry contracted for a ninth consecutive month in Dec, with the performance of services index dropping from 48.0 to 47.3. The Kiwi remains soft ahead of RBNZ rate decision on Thursday which is expected to have another 100bps cut in the OCR from 5.00% to 4.00%.

 

Trading during Asian hours earlier this morning was subdued due to the Chinese New Year celebrations which continue all week. Compounding the general lack of interest was the fact that both Australia and Singapore were enjoying days off as well.

The day began with the Pound suffering once again following reports in the UK press of one of the MPC members, Blanch flower, calling for UK rates to be cut to zero or 0.25% to help stimulate the economy back into action. GBP/USD fell from near 1.3800 to 1.3550 in very illiquid trading. The pair later recovered towards 1.3650 but remains vulnerable.

 

EUR/USD followed suit but not by such a dramatic amount. In fact, the USD made gains across the boar more on a risk aversion move than anything else. This also saw the JPY higher but this proved to be a temporary measure as traders who were in the market were quick to take profit on these exaggerated moves.

Far East trading will likely remain quiet thanks to the Chinese holidays this week and the fact that the FOMC decision is due on Wednesday.

 
US Existing Home Sales at 3:00 PM (GMT) may prove to be a catalyst late into the session with expectations calling for a -2.0% contraction in December.

Amid Heightened Banking Fears

The dollar and yen benefited from another bout of heightened risk-aversion, rallying sharply against the euro and sterling as a result of safe-haven flows. Both currencies will likely continue to reap the rewards from growing apprehension over the banking system and the extent and duration of the global economic recession. 

The economic calendar today was light, with the release of the NAHB housing survey, which drifted lower to 8 in January versus 9 a month earlier. The housing index fell to its lowest level on record, with expectations of home sales over the next 6 months at 17 in January versus 16 from December. The Thursday session will see December building permits, housing starts and weekly jobless claims. Building permits are estimated to slip to 610k units, down from 615k units in November. Housing starts are also seen falling, down to 610k units versus 625k units a month prior. Meanwhile, weekly jobless claims are estimated to edge higher to 540k from 524k.