US Dollar, Japanese Yen Dive as Bernanke Comments, Home Sales Boost Optimism for Global Recovery
The US dollar and Japanese yen were hit hard, once again, by increased risk appetite following the release of optimistic comments by Federal Reserve Chairman Ben Bernanke and better-than-expected of US housing data. In a prepared speech from the Jackson Hole conference of global central bankers and finance officials, Bernanke mostly gave a summary of how the central bank has responded to the "most severe financial crisis since the Great Depression," but the markets honed in on one comment: we are "beginning to emerge" from a deep global recession. He also cited challenges to growth, though, as persistent strains in the financial markets, “significant” additional losses for financial institutions, and a lack of credit supply for businesses and households will lead the economic recovery “to be relatively slow at first, with unemployment declining only gradually from high levels.” Regardless, the markets brushed this off, especially in light of the strong housing data.

The National Association of Realtors said that existing home sales jumped 7.2 percent in July to an annual rate of 5.24 million, the highest since August 2007. While supply levels went unchanged at 9.4 months, values continued to drop with median prices now down 15.1 percent from a year ago at $178,400, compared to $182,000 in June. It looks like the US government’s $8,000 tax credit for many new homebuyers, low interest rates, and cheaper prices are working together to boost property sales. That said, there is one big remaining threat for the housing sector: rising unemployment. According to the Federal Reserve’s estimates, the unemployment rate is anticipated to climb through the rest of the year, perhaps as high as 10.1 percent, before starting to fall slightly lower in 2010 and 2011. As long as this is the case, consumer sentiment will remain uneasy and there will be fewer qualified buyers. Furthermore, the tax incentive to buy a home ends in November, all of which suggests that any growth will be slow at best.

Next week, there will be a handful of US economic indicators that could prove to be market-moving. On Tuesday, the Conference Board’s measure of US consumer confidence is expected to rise slightly to 47.8 from 46.6 in July. On Wednesday, US durable goods orders are projected to show a 3.0 percent increase in July following a 2.5 percent drop in June, but excluding transportation the index is forecasted to only rise by 0.8 percent. On Thursday, the second round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see revisions. The preliminary reading is forecasted to be revised down to -1.4 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Finally, on Friday, personal income in anticipated to rise by 0.1 percent for the month of July,  while personal spending is forecasted to rise by 0.2 percent, but based on the steep decline we saw in consumer confidence during that period, consumption could be somewhat disappointing.

Related Article: FX Carry Trade Direction Hinges Upon Proof of Global Economic Recovery

British Pound Fails at 1.66 as UK Rate Expectations Slip Lower
The British pound joined the low-yielding US dollar and Japanese yen as the weakest of the majors on Friday, with GBPUSD failing to break above 1.6600, as interest rate expectations for the UK continue to fall. Indeed, Credit Suisse overnight index swaps are now pricing in 86.1 basis points worth of hikes by the Bank of England over the next 12 months, compared to 124 basis points two weeks ago. While there was no UK data on hand on Friday, traders may have kept in mind Thursday’s news, as the UK government posted a deficit of 8 billion pounds in July, the biggest since recordkeeping began in 1993, highlighting the dour state of the nation's finances. Standard & Poor's lowered its outlook on the UK's AAA credit rating to “negative” from “stable” in May for this very reason, and if we see this trend continue, the risk for an actual downgrade will grow and put greater pressure on the British pound. Next Friday, the UK will also face a second round of growth results, but Q2 GDP is not anticipated to be revised from previous estimates of a 0.8 percent quarterly contraction and a 5.6 percent annual contraction, the worst since recordkeeping began in 1955.

Euro Makes Headway as German Services, French Manufacturing Sectors Expand in August
The euro gained against most of the majors following the release of the Purchasing Managers’ Indices (PMI) for the manufacturing and services sectors of France, Germany, and the Euro-zone as a whole in the month of August. The data was surprisingly strong, with German services PMI surging to a 16-month high of 54.1 and French manufacturing PMI hitting a 15-month high of 50.2. Together, these helped push the Euro-zone composite PMI, which encompasses both manufacturing and services, up to a 14-month high of 50 from 47.0. Now, 50 is the point of neutrality for these indices, so the data suggests that business activity in the Euro-zone stagnated during August, but put into perspective with the record lows we saw in the first quarter, the news is positive.

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