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Forex: USD Steady Even as 4Q GDP Contracts, FOMC Meeting in Focus

Forex: USD Steady Even as 4Q GDP Contracts, FOMC Meeting in Focus

David Song, Strategist

Talking Points

  • U.S. Dollar: 4Q GDP Contracts, Private Consumption Remains Resilient
  • Euro: ECB Three-Month Lending Declines, Credit Conditions Tightened in 4Q
  • British Pound: U.K. Mortgage Applications, Consumer Credit Tops Forecast

U.S. Dollar: 4Q GDP Contracts, Private Consumption Remains Resilient

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) pared the advance to 10,174 as the advanced 4Q GDP report showed the growth rate contracting 0.1% versus forecast for a 1.1% rise, but we’re seeing a fairly muted reaction to the development as market participants turn their attention to the Federal Open Market Committee (FOMC) interest rate decision scheduled for 19:15 GMT.

Although the headline GDP reading casts a dour outlook for the world’s largest economy, a deeper look at the report showed personal consumption increased 2.2% amid projections for a 2.1% print, while disposable income was the largest since 2Q 2008 even as the savings rate increased to 4.7% from 3.6% during the three-months through September.

As the data raise the outlook for private sector consumption – one of the leading drivers of growth – we should see the economic recovery gradually gather pace in 2013, and we may see the FOMC interest rate decision have a larger impact on the major currencies as a growing number of central bank officials take note of the more broad-based recovery.

Euro: ECB Three-Month Lending Declines, Credit Conditions Tightened in 4Q

The Euro rallied to a fresh yearly high of 1.3561 as a report by the European Central Bank (ECB) showed commercial banks took up EUR 3.7B in three-month loans, which compares to the EUR 6.2B offered at the last refinancing operation, while Governing Council member Ewald Nowotny argued that the single currency ‘is still moving within the usual, the long-term band’ as European policy makers increase their effort to address the risks surrounding the region.

However, the ECB saw tightening credit conditions in the four quarter amid a ‘pronounced net decline’ in demands, while European Union President Herman Van Rompuy warned that ‘there is still a long, long way to go’ amid record-high unemployment along with the persistent slack in the real economy. As the euro-area struggles to return to growth, we should see the central bank continue to embark on its easing cycle in 2013, and we may see the Governing Council target the benchmark interest rate as the economic downturn threatens price stability.

As European commercial banks prepare to repay the borrowed funds from the Long-Term Refinancing Operation, positive headlines coming out of the region may prop up the single currency over the near-term, but the Euro remains poised to face additional headwinds throughout 2013 as the debt crisis continues to drag on the real economy.

As the relative strength index on the EURUSD pushes into overbought territory, we should see a near-term correction once the oscillator falls back below 70, and we may see the single currency struggle to hold its ground ahead of the next ECB interest rate decision on February 7 as the governments operating under the monetary union continue to call upon the central bank to encourage a sustainable recovery.

British Pound: U.K. Mortgage Applications, Consumer Credit Tops Forecast

The British Pound extended the advance from earlier this week and rallied to an overnight high of 1.5783 amid the slew of positive developments coming out of the U.K.

Mortgage Approvals increased an annualized 55.8K in December amid forecasts for a 54.5K print, while Net Consumer Credit expanded another 0.6B during the same period to mark the largest advance since December 2010.

As the Funding for Lending scheme continues to feed through the real economy, the non-standard measure should help to produce a more meaningful recovery in 2013, and we should see the Bank of England (BoE) move away from its easing cycle as growth and inflation picks up.

Indeed, the rebound off of the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680 should gather pace as the relative strength index bounces back from oversold territory, but risk trends may drive the sterling in the days ahead as the economic docket for the U.K. remains fairly light for the remainder of the week. Nevertheless, as the GBPUSD preserves the multi-year upward trend, we anticipate a more meaningful move to the upside, and the sterling may continue to gain ground ahead of the next BoE meeting on February 7 as market participants scale back bets for more quantitative easing.

FX Upcoming










FOMC Rate Decision






RBNZ Official Cash Rate



--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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