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At 10:00:00 AM US Feb Consumer Confidence (exp 97.1, prev 97.3)
The dollar pushed higher against the European majors but was little changed from yesterday's NY close around 133.80 yen in London trade. Helping the dollar was the euro's failure to leverage a better than expected rise in the German Ifo survey into a sustainable gain. EUR/USD fell sharply after the release from a day's high of 87.22 to a one-week low of 86.74. However, dealers are expected to remain on the sidelines until today's release of US consumer confidence data.
Germany's February IFO business climate rose to 88.7, beating the consensus expectation of 87.3 and above the previous 86.3 in January. The euro jumped to day's high of 87.22 after better than expected Ifo, after having edged higher towards resistance at 87.10 ahead of the survey. However, the current conditions index was weak and EUR/USD slipped back below 87 cents shortly afterwards, indicating the euro's lack of strength and further evidence of the dollar dominating the movements in EUR/USD. The Ifo's Nerb said the survey data show the German economy close to turning point. But, the ECB still has room to cut interest rates by 25 basis points, he said.
Boding well for the dollar today was its recovery against the euro after a better than expected Germany Ifo survey failed to spur the euro higher. But FX markets are seen trading steady ahead of Japan's anti-deflation measures and Greenspan's speech on Wednesday as well as the Bank of Japan's monetary policy meeting on Thursday.
Today's key economic release is the US Conference Board's consumer confidence index which is expected to edge lower to 97.1 in February from 97.3. Economists predict a decline after the preliminary reading of the University of Michigan consumer sentiment fell two weeks ago, driving the dollar lower with it. The U. Mich survey fell unexpectedly for the first time in five months to 90.9 in the preliminary February reading from the previous 93.0. Moreover, the U. Michigan Consumer Expectations component slid to 86.8 in the preliminary February reading from 91.3 in January, reflecting pessimism about a US economic recovery that was further exacerbated by fears of improper corporate accounting practices arising from the Enron debacle. But, some note that U. Mich was a preliminary February reading and the Conference Board index could surprise on the upside. Sterling followed the euro lower against the dollar, falling below support at 1.4250 to a day's low of 1.4239. GBP/USD is also under pressure of its own after a failed attempt to break key resistance at 1.4335 on Friday resulted in a selloff to 1.4240 on Monday. GBP/USD support seen at 1.4235, 1.4200 and 1.4150. Upside capped at 1.4280, 1.4340, 1.4365 and 1.440. Sterling remains weak after back-to-back surprise declines in UK retail sales were seen as a sign that the UK's two-speed economy may be converging finally. With consumer spending falling and manufacturing slowly rising, it stands in sharp contrast with the upbeat outlook for the US. GBP also likely to remain under pressure on further EMU concerns which can weigh on the pound because markets anticipate the pound to join at a lower value. Moreover, fears of pension reform that could divert asset away from UK investments, and a possible tax hike to pay for health care reform are two other factors weighing on sterling over the past few days. EUR/CHF fell to key near term support at 1.4750 in late Tokyo trade on speculation that the Swiss National Bank will not cut its interest rate target in March despite a weak economy. Three-month Swiss franc LIBOR was fixed slightly lower on Monday at 1.69333 percent compared to 1.70000 on Friday and remains in the lower half of the 1.25 to 2.25 percent target range of the SNB after its December rate cut. Markets will also focus on tomorrow's key Swiss KoF leading indicator for January which is expected to show a slight improvement in the Swiss business outlook. But given the sliggish view in comparison to recent US data, USD/CHF is expected to add to its recent gains. USD/CHF rose to a day's high of 1.6985. Support is seen at 1.6940 and 1.6880.
Advanced details of Japan's anti-deflation package had little effect on the yen today. Markets are bracing for another disappointment after today's draft of PM Koizumi's anti-deflation package showed little sign of delivering the economy from a 3-year slide in prices, and also appeared to be a rehash of previous efforts.
Consequently, if the government fails to deliver a concrete reform package on Wednesday, the Bank of Japan may also decide not to further ease monetary policy on Thursday since increased liquidity is ineffectual amid structural barriers causing rampant deflation and lack of demand. This is the same reason the yen has responded less and less to recent increases in liquidity, because it is not leading to inflation and therefore not diminishing the value of the yen.
Therefore, barring a strikingly bold reform package (which is unlikely) the yen is in a lose-lose situation because if the BoJ takes no action the yen is likely to weaken on disappointment. Or, if the BoJ does inject more liquidity, the yen could, as in the past, weaken in reaction. Upside capped at 134.50, followed by 134.85 and strong resistance at 135.15. Support holds at 133.20, 133.0 and 132.50
Meanwhile, the dollar remained supported by yesterday's rally in US stocks and optimism about Fed Chairman Greenspan's testimony before the House Financial Services Committee on Wednesday. Greenspan's outlook is expected to be more upbeat and should be supported by a number of key US indicators including GDP, Chicago PMI, and the ISM Purchasing Managers survey which are all forecasted to show remarkable improvement, reflecting the emerging recovery in the US. Markets will look for any hints that the chairman is becoming more bullish on the prospects for the US recovery (ie. Business investment, final demand) and whether the Fed may soon shift its bias to neutral from easing.