FOREX TRADING

The Euro may see selling pressure emerge in the coming session as the Euro Zone Consumer Price Index shows that inflation fell for the second consecutive month in July, stoking risks of deflation that could commit the currency bloc to a long-term period of economic stagnation.

Key Overnight Developments……. (more…)

The US Dollar avoided a breakdown in overnight trading despite sharp gains across Asian stock exchanges as the market continued to look ahead to this week’s record-setting $115 billion US Treasury bond auction that promises to boost long-term interest rates and spur demand for the greenback. Germany’s GfK Consumer Confidence report is on tap in European hours.

Key Overnight Developments

• Bernanke Defends Fed’s Independence, Supports “Strong Dollar Policy”
• Buyers Returning to UK Housing Market, Reveals Hometrack Survey
• US Dollar Avoids Breakdown Despite Stock Rally, Bond Auction Looms Ahead

Critical Levels

The Euro and the British Pound traded near familiar levels against the US Dollar despite a sharp rally across Asian stock exchanges that would have been expected to weigh on the safety-linked greenback. The MSCI Asia Pacific added over 1% overnight, putting in 10 consecutive days of gains for the first time since 2004. We noted last week that the majors were showing signs of diverging from risk trends following the US Treasury’s announcement of a record-setting $115 billion bond auction that stands to boost long-term interest rates and spur US Dollar demand.

Asia Session Highlights

US Federal Reserve Chairman Ben Bernanke defended the central bank’s independence at the taping of a “town hall”-style meeting for PBS, saying the Fed is already “very accountable” to Congress and stressing that citizens don’t want Congress running monetary policy. On the economy, Bernanke said that credit markets are still “very constrained” and warned that employment won’t recover for “a while”, forecasting that the jobless rate will likely exceed 10%. Regardless, the Fed chief said he has “tremendous confidence” in the US economy, saying output will be “growing strong” within a few years. Answering critics that have argued policymakers’ actions would stoke future inflation, Bernanke said the Fed does not want to “over-stimulate” the economy and is “very confident” it has the tools to unwind the emergency liquidity-boosting measures put in place amid the financial crisis. Bernanke added that it was too early to judge the impact of the government’s stimulus plan, but stressed that Congress needs to come up with a plan to restore fiscal balance by trimming the burgeoning budget deficit. Commenting on currencies, Bernanke echoed the Treasury’s mantra of support for a “strong Dollar policy” and said a stronger US economy will bolster the greenback.

In the UK, the Hometrack Housing Survey revealed that real estate prices fell -7.7% in the year to July, the slowest pace of decline since October 2008. Details of the report revealed that property sellers were able to secure 91.5% of their initial asking price in the final transaction, marking the eighth consecutive month that their bargaining power has improved; meanwhile, the average time a property spent on the market before being sold fell to 9 weeks, the lowest in over a year. On balance, the survey reinforces reports of a rebound in buying interest that has been noted in other recent data. That said, rising unemployment may prove to be a barrier to a near-term rebound in real estate prices: the jobless rate is expected to top approach a whopping 9% by the end of this year, trimming incomes and hindering Britons’ ability to pay their mortgages. This is likely to boost repossessions, flooding the market with fresh supply and sending property values downward.

Euro Session: What to Expect

Germany’s GfK Consumer Confidence gauge is expected to stall at 2.9 in August after rising for two consecutive months in June and July. Last month, the market research firm commented that, “Reports that the inflation rate stood at zero percent in May are having a positive effect on income expectations and the propensity to buy.” Although falling prices stand to boost spending in the short term, entrenching expectations of deflation will work against consumption, encouraging people to wait for the best possible bargain and perpetually put off purchases. Clearly, this threatens firms’ revenues and darkens the outlook for employment, which in turn can reasonably be expected to put the brakes on any rebound in consumer sentiment. Most worryingly, the onset of deflation may already be at hand, with Germany’s Consumer Price Index set to show later this week that the annual pace of inflation turned negative for the first time in 23 years.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar Avoids Breakdown Despite Stock Rally, Bond Auction Looms Ahead (Euro Open)

The U.S Dollar rose against most other major currencies Tuesday, as comments by Ben Bernanke eased concerns that policy-makers won’t act decisively to head off inflation spawned by efforts to counter the credit crisis. The Federal Reserve Board chairman’s testimony was favorable for the USD, as his assessment on the U.S. economy revived the greenback’s safe-haven appeal.

USD – Dollar Rises on Increased Risk Aversion

The U.S. Dollar rebounded while U.S. stocks retreated yesterday after initial gains were overshadowed by cautious outlooks on the economy from corporate executives and Federal Reserve Board Chairman Ben Bernanke. As a result, the USD finished yesterday trading session 100 pips higher against the GBP at the1.6410 level. The greenback also saw bullishness against the EUR and closed at 1.4175.

U.S. government debt prices rose sharply on Bernanke’s comments that an easy money policy would likely be needed for an extended period. Moreover, risk appetite had increased in the past few days after stronger-than-expected U.S. corporate earnings. The latest to report higher-than-expected quarterly results was manufacturer and Dow component Caterpillar Inc. yesterday.

Looking ahead to today, the most important economic indicator scheduled to be released from the U.S. is the Crude Oil Inventories report at 14:30 GMT. Traders will be paying close attention to today’s announcement as it has the potential to boost the USD in the short-term. Traders are also advised to follow Federal Reserve Board Chairman Ben Bernanke’s testimony at around 14:00 GMT. This testimony is very important as it is very likely to impact the Dollar’s volatility. Traders are advised to watch closely, as this is likely to set the pace of the USD going into the rest of the week’s trading.

EUR – EUR and GBP Erase Gaines on all Fronts

The EUR weakened against most of its major currency rivals yesterday on concerns CIT Group Inc. may file for bankruptcy, renewing demand for a refuge. By yesterday’s close, the EUR fell against the JPY, pushing the oft-traded currency pair to 133.17. The EUR experienced similar behavior against the CHF and closed at 1.5160.

The British Pound also fell against the U.S Dollar as a report showed the U.K budget deficit climbed in June to the highest per month since records began in 1993, fueling concern the government will struggle to find buyers for its assets. The drop pushed the GBP down from near the highest level this month against the Dollar. The budget shortfall rose to 13 billion Pounds from 7.5 billion a year earlier. Gilts reversed earlier declines after Federal Reserve Board Chairman Ben S. Bernanke told Congress that policy makers will keep Interest Rates “exceptionally low.”

Today, there is plenty of economic news coming from the Euro-Zone that will determine the GBP and EUR levels by the end of today’s trading. From the Euro-Zone, there are the European Industrial New Orders, and French Consumer Spending figures. From Britain, the most important news will be the MPC Meeting Minutes and CBI Industrial Order Expectations figures. All these news events will be important in helping set the strength of the GBP and EUR in this week’s trading.

JPY – Yen Strengthens on Bernanke Testimony

Japan’s currency rose against most of its major counterparts after Bernanke mentioned that at some point the Fed “will need to tighten monetary policy” to counter the emergence of an inflationary problem. The Yen also advanced from near a 2 week low against the U.S dollar on speculation Japanese exporters bought the currency after its 1.8% decline last week.

Traders today have very little fundamental news emanating from Japan as the only indicator being released is the trade balance report. Analysts forecast the figure to increase from its previous reading. This indicator typically generates small amounts of volatility. However, the USD and the GBP appear to be clutching the reins of today’s market. Traders would be wise to note its future direction as it usually carries a heavy impact on the other currencies.

Crude Oil – Oil Stabilizes after Steady Appreciation

Crude Oil slid down slightly, to just above $65 a barrel, on Wednesday, after data showing an unexpected rise in U.S. crude stocks underscored worries about persistently weak demand from the world’s top oil user. The U.S. crude oil stockpiles rose unexpectedly last week as domestic refining activity slumped, the American Petroleum Institute (API) said on Tuesday. However, firm equity markets and a weak Dollar could lend some support to Oil, analysts say.

Crude prices climbed 8.7% for the past week as investors bought futures on expectations of higher fuel demand. Optimism that the worst of the global recession is over followed gains in U.S. leading economic indicators and as financial service companies said earnings climbed.

Article Source – Greenback Rebounds from 6-Week Low