US Dollar, Japanese Yen Down as Equities Bounce Despite Steep Drop in US Home Sales

US Dollar, Japanese Yen Down as Equities Bounce Despite Steep Drop in US Home Sales
The US dollar and Japanese yen were the prime laggards of the day, as the majors consolidated last week’s moves and equities rose from Friday’s lows. Nevertheless, US economic data was deeply disappointing as existing home plunged 16.7 percent during the month of December, according to the National Association of Realtors, which was the sharpest drop in over 40 years. A breakdown of the report shows that inventories rose to 7.2 months from 6.5 months as median prices jumped to $178,300 from $170,000 in November. Furthermore, median prices are now up 1.5 percent from a year ago, marking the first year-over-year increase since August 2007, suggesting that the government's tax incentives for homebuyers have helped to stabilize prices. However, with demand now lower and supplies rising, sellers may be forced to bring down their prices once again, especially since unemployment rates are still in the double-digits.

There was no major economic data on hand from Japan, but overnight, the Bank of Japan is likely to leave their target rate unchanged at 0.10 percent. This doesn’t tend to be a very market-moving report from a fundamental perspective, but signs that the central bank’s policy makers are concerned about Japan’s economic outlook could hurt optimism on growth for the global economy. Then, on Tuesday, the Conference Board’s measure of consumer confidence for January is projected to rise to a 5-month high of 53.5 from 52.9. Such a move seems feasible in light of the increase in the University of Michigan’s preliminary report on consumer confidence, which showed on January 15 that the index rose to a 2-year high of 72.8 from 72.5.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week of January 25

British Pound Dominates as GBPJPY Leads the Way Ahead of UK Q4 GDP
The British pound was the strongest of the majors on Monday, as GBPJPY soared over 1 percent from support at the 50 percent fib of 139.30-150.70 at 144.99. There was no key data on hand, but this will change on Tuesday when traders will get a better sense of whether the UK economy finally emerged from recession as the advance reading of Q4 GDP will be released. The quarterly rate is projected to rise for the first time since Q1 2008 by 0.4 percent, while the annual rate is anticipated to improve to -3.0 percent from a near-record low of -5.1 percent. Overall, there are some upside risks for this report, as the purchasing managers’ index (PMI) for both the services and manufacturing sectors held above 50 and hit two-year highs in October, November, and December, indicating an expansion in activity. On the other hand, PMI for the construction sector continues to reflect a contraction in activity, albeit at a slower pace than at any other point of the recession. All told, any positive quarterly GDP result should yield a very strong reaction from the British pound, and this is the most probable outcome. However, if the figure continues to signal a contraction in the UK economy, the currency could drop sharply on speculation that the BOE will have no choice but to expand their quantitative easing program next month.
    
Related: Discuss the British Pound in the DailyFX Forum

Euro Mixed as GfK Consumer Confidence Falls to 7-Month Low
The euro was mixed on Monday as EURUSD continued to consolidate its recent losses. Euro-zone economic data was in line with expectations, as the GfK's measure of German consumer confidence fell for the fourth straight month in February to a seven-month low of 3.2 from 3.4. Though a current breakdown is not available yet, previous readings have shown that the components measuring willingness to buy and income expectations have registered fairly strong results, while business expectations have been consistently weak. This is generally in line with the very mixed results we saw in last week’s German ZEW report, which showed that investors are feeling more confident in current economic conditions, but are becoming increasingly pessimistic about the outlook as the financial markets show signs of pulling back. Ultimately, similar trends could reveal themselves on Tuesday, as the IFO measures of business confidence – business climate, current assessment, and expectations – are all projected to either improve or go unchanged.

Related: Discuss the Euro in the DailyFX Forum,

Australian Dollar Higher Despite Signs of Waning Inflation Pressures
The Australian dollar and New Zealand dollar climbed against most of the majors on Monday, despite Sunday evening’s release of the Australian producer price index (PPI). PPI unexpectedly slumped 0.4 percent during Q4, which dragged the annual rate down to a record low of -1.5 percent from 0.2 percent. The data highlights the impact of the Australian dollar’s appreciation, as it slashed down the price of imported items. Furthermore, the declines create downside risks for the release of the nation’s consumer price index (CPI) on Tuesday. The pace of growth in Australia's headline CPI is forecasted to have slowed to 0.4 percent during Q4, down from the 1.0 percent rate we saw in Q3. However, the annual rate is projected to accelerate to 2.0 percent from 1.3 percent, and the Reserve Bank of Australia’s core measures are projected to remain at more robust levels as well. The annual trimmed mean is anticipated to hold at 3.2 percent while the weighted median is forecasted to slip to 3.5 percent from 3.8 percent. All told, such moves would tell us that the rebound in demand fizzled out at the end of the year, which may cut into rate expectations for the RBA. At the time of writing, Credit Suisse overnight index swap rates were pricing in a 65 percent chance of a 25 basis point increase by the RBA during their next meeting on February 1, but stronger- or weaker-than-expected consumer prices could lead to a quick shift in these rates, as well as the Australian dollar.

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