US Dollar Tries to Recover, But Upcoming Housing and Sentiment Data Could Reverse the Gains

News during the Asian trading session that the Abu Dhabi Investment Authority would invest $7.5B in Citibank led the Nikkei to rebound, and pushed FX carry trades like USDJPY and GBPJPY to rocket higher as well. While the positive sentiment waned over the following few hours, the greenback remains stronger than yesterday, with pairs like EURUSD and GBPUSD down slightly from Monday’s highs near 1.49 and 2.07, respectively. Nevertheless, as London traders started to come into play, better-than-expected German sentiment data along with disappointing forecasts for today’s US economic data reignited the Euro.

Indeed, the German IFO business climate survey surprisingly rose in November to 104.2 from 103.9, putting an end to six consecutive months of declines. Current assessments remained buoyant as well, suggesting that investors are still relatively optimistic despite instability in the financial markets and the tightening of credit conditions. However, the expectations component fell back to 98.3 from 98.6, signaling some hesitance regarding the outlook as the European Central Bank cites downside risks to growth. The figures will underpin the case for the ECB to stay on hold in the near term as the economy remains stable and price pressures mount, but if we see the Federal Reserve give into market expectations and cut rates in December – despite inflation risks – the move could give Trichet the green light to at least consider making monetary policy more accommodative. The same may be said for the Bank of England, which already has two MPC members – Gieve and Blanchflower – in favor of reducing rates by 25bp, as reflected in the November meeting minutes. However, the dissenters may have some persuasive work to do, as seven policy makers remained in favor of leaving rates unchanged, including the BOE’s Chief Economist Charles Bean who said recently, “The backdrop to our attempts to keep inflation in line with target is less favorable than it has been…If the imported component of inflation is somewhat higher, the domestically generated component needs to be somewhat lower to compensate, and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down.”

Meanwhile, the Swiss producer and import price index rose less than expected in October at a rate of 0.2 percent from the month prior and 2.7 percent from a year earlier. While producer prices went unchanged, the import price component may be of concern to the Swiss National Bank. Indeed, the Euro-zone is Switzerland's biggest trade partner, and the weakness of the Swiss franc relative to the Euro creates the potential for inflation risks. In fact, import costs rose 0.7 percent during the month, led by agricultural products, mining, good, and petroleum products. With these price pressures unlikely to fade in the near term, there is a greater probability that the SNB will take the road less traveled and continue normalizing rates in December.

Today’s US data may bring gloomy news to the forefront once again, as the S&P/Case-Schiller index is expected to show that house prices fell for the third consecutive quarter in Q3, while the Conference Board’s consumer confidence survey is forecasted to drop to a two year low. Neither release will come as a huge shock to the markets, but if the figures prove to be worse than expected, the greenback could easily go back to its losing ways and push EUR/USD higher for a test of 1.49.