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US Dollar Mixed on Signs of Deterioration in Housing, Dovish Comments from Fed’s Bullard

•    British Pound Falls Across the Board as BOE Minutes Reflect Potential for Expanded Quantitative Easing
•    Euro Rallies Despite Widening Current Account Deficit in Euro-zone
•    Canadian Dollar Lags Despite Signs of Percolating Inflation

US Dollar Mixed on Signs of Deterioration in Housing, Dovish Comments from Fed’s Bullard
The US dollar fell against the euro and Swiss franc on Wednesday amidst indications that inflation remains within the Federal Reserve’s comfort level, housing conditions deteriorated, and amidst dovish comments from a central bank official. The US consumer price index (CPI) rose more than forecast in October at a rate of 0.3 percent, led by increasing energy and transportation costs. Even excluding volatile food and energy costs, core CPI still rose 0.2 percent on a monthly basis, pushing the annual rate up to a 4-month high of 1.7 percent from 1.5 percent.

Meanwhile, US housing market indicators from the Commerce Department showed a sharp deterioration in conditions in October, as housing starts plunged 10.6 percent to an annual rate of 529,000, marking a six month low. Likewise, applications for housing permits slumped for a second month to a five-month low of 552,000. There are a variety of factors behind the decline, including rising unemployment and uncertainty about whether the Federal government would enact an extension on the first-time homebuyer tax credit. We now know that the program was extended to April 30, 2010 and the income ceiling for single taxpayers was raised to $125,000 from $75,000, all of which suggests that housing conditions should improve going through the start of Q2 2010.

Finally, comments from Federal Reserve Bank of St. Louis President James Bullard reflected a dovish bias, and though he is not currently a voting member on the Federal Open Market Committee (FOMC), he will be next year. During a speech, Bullard said that in the past two recessions, "the FOMC waited two and a half to three years before we started our tightening campaign. If we took that as a benchmark, that would put us in the first half of 2012.” That has led fed fund futures to price in even lower odds for a 25 basis point rate hike by the FOMC in mid-2010, leaving the US dollar under pressure.

Related: Discuss the USDJPY in the DailyFX Forum

British Pound Falls Across the Board as BOE Minutes Reflect Potential for Expanded Quantitative Easing
The British pound dove this morning on indications that Bank of England (BOE) Monetary Policy Committee members are not in agreement over how the central bank should deal with lingering problems in the economy and in credit conditions. The vote count for the BOE’s last policy decision - in which the MPC left the Bank Rate at 0.50 percent and expanded their Asset Purchase Facility (APF) by £25 billion to £200 billion - showed that one member wanted to increase the APF by £40 billion while another didn’t want to change the program at all. Following the news, Credit Suisse overnight index swap (OIS) rates shifted to price in 64.3 basis points worth of rate increases by the BOE over the next 12 months, compared to 71.3 basis points earlier this week. From a technical perspective, rising trendline support should come into play for GBPUSD, but with UK public sector net borrowing due to be released on Thursday morning, indications that the nation’s budget deficit is still rapidly widening could put the currency under greater pressure.

Related: Discuss the British Pound in the DailyFX Forum

Euro Rallies Despite Widening Current Account Deficit in Euro-zone
The euro’s consolidation continued on Wednesday, as falling trendline resistance at 1.4990 prevented EURUSD from pushing higher. However, the euro was still one of the strongest major currencies by the end of the trading day. Looking to the news on hand, the Euro-zone current account registered a deficit of €5.4 billion during September, compared to a surplus of €0.6 billion in August. A breakdown of the report shows that the goods balance narrowed to a four-month low of €4.0 billion from €5.5 billion, suggesting that exports aren’t providing the same boost they were just a few months ago. This also indicates, though, that demand from within the Euro-zone for imported goods is rising, which may also stand to benefit European producers if they are actively buying domestic goods as well.

Related: Discuss the Euro in the DailyFX Forum

Canadian Dollar Lags Despite Signs of Percolating Inflation
The Canadian dollar was one of the weakest majors on Wednesday as the release of the Canadian consumer price index (CPI) had almost no impact, even though the data indicated positive price growth for the first time in five months. The annual CPI rate edged up to 0.1 percent in October from -0.9 percent while the Bank of Canada’s (BOC) core measure, which excludes gas and other volatile costs, jumped to an annual rate of 1.8 percent from 1.5 percent. BOC said in their most recent policy statement that “overall risks to its inflation projection are tilted slightly to the downside,” but if we continue to see CPI rates rise in coming months, the markets may start to consider the possibility that the central bank will raise rates before the end of Q2 2010.

Related: Discuss the Canadian Dollar in the DailyFX Forum

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

DailyFX provides forex news on the economic reports and political events that influence the currency market.
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