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What We Are Watching
USD looking weaker
Pound rallies even as the Bank of England issues negative forecasts
US Durable Goods Orders & Pending Homes Sales
In our BoE Inflation Report review yesterday, we wrote yesterday about the Pound’s ability to gain even as the central bank issued a pessimistic view of the UK. The GBPUSD’s strength got us taking a closer look at how the USD. In that regard the USDJPY has fallen back below 80.00 and is trying to crack 79.00. Also, the EURUSD, which looked ready to capsize yesterday following negative news from Italy, failed to hold onto its early weakness as was back around 1.2500 by the end of the day. As such, we are clearly seeing a pause in dollar related gains taking place after last week’s post-FOMC rally. The weakness is coinciding with US economic data that has been mixed this week with Monday’s New Homes Sales beating expectations, while yesterday’s Consumer Confidence missing forecasts. Today we will see the release of US Durable Goods and Pending Homes Sales numbers.
Looking ahead, we can look at last week’s FOMC Meeting in two ways. On one hand, the Fed did go ahead with Operation Twist, which showed they were willing to apply new stimulus. On the other hand, by stearing clear of a new round of QE3, it revealed that the Fed is taking more of a passive approach. As such, we can expect US economic data to be a bigger driver of movement in the USD going forward, until a clearer picture emerges of whether the Fed is only getting started or not.
In our Forex Rant video this morning our belief was that the EURUSD may have limited downside and Euro shorts may want to consider shorting the EURGBP and EURAUD instead. Specifically, after yesterday's news from Italy yielded an Italian bank bailout, rumors of PM Monti resigning, and higher debt yields we would have expected the EURUSD to show wider losses. As such, with the EURUSD we are focusing on the upside today as we believe it could be a breakout candidate higher if it can trade above its 1.2525 resistance.
After holding most of its post Inflation Report gains, the next step for the GBPUSD is to trade and hold above yesterday's highs. On such a scenario, it would reveal that yesterday's buying momentum has staying power and could trigger a longer rally towards the 1.5800 figure.