Talking Points
• Japanese Yen: Slightly softer as risk aversion starts to fade
• Australian Dollar: Demand for credit surged 1.7 percent in November
• Euro: Bearish test of 1.47 proves unsuccessful
• British Pound: Surges above 2.00 as EURGBP collapses
• US Dollar: NAR existing homes sales may exacerbate dollar weakness
For those who actually stuck around to watch the FX markets today, one had to look at crosses like EURGBP to find any sort of price action. Indeed, the pair tumbled throughout the morning to break below 0.7350, helping to propel GBPUSD above 2.00 and push EURUSD down for an unsuccessful test of 1.47. There was no data on hand to perpetuate such a move, but year-end profit taking was the likely culprit, and the price action was simply amplified by thin trading volumes.
Indeed, the ascent of EURGBP over the fourth quarter has been remarkable, as the pair took on record highs of 0.7389 late last Friday. However, this morning’s decline reflects a pull back from important resistance, and suggests that the end may be near for the pair’s massive rally. Looking at the fundamentals of the situation, EURGBP couldn’t continue higher forever. Much of the impetus for the gains was the perceived biases of the European Central Bank and the Bank of England, as ECB President Trichet remained steadfastly hawkish as CPI grew to 3.1 percent year-over-year, while BOE Governor King folded under the pressure of ultra-restrictive credit conditions and cut rates in December. However, with inflation pressures anticipated to let up in 2008, and economic expansion almost certain to slow globally, the shift away monetary policy tightening cycles isn’t entirely surprising. The ECB is essentially one of the last central banks to maintain such a staunchly hawkish stance, and when it is clear that Trichet & Co. have given up and interest rate expectations for the Euro-zone subside, the Euro and the EURGBP pair in particular will suffer.
Looking ahead to this morning’s US data, the NAR is expected to report that existing home sales held at 4.97 million - the lowest reading since record-keeping began in 1999. Sales of existing homes account for nearly 85 percent of the market, so this particular release serves as a good indicator of the status of the sector as a whole, and the result may not be pretty. Given the thin trading volumes we’re seeing ahead of the January 1 holiday, a particularly disappointing release could be dismal for the US Dollar and the DJIA. For a full outlook of the NAR existing home sales report and its potential impact on FX, fixed income, and equity markets, check out DailyFX Cross Market Reactions.
If you would like to discuss this article with other traders or Currency Analyst Terri Belkas, please visit the DailyFX Forum.
The DailyFX Research Team will be away from the desk tomorrow, but we wish all of our readers a Happy New Year and a profitable 2008!
