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At 2:00:00 AM Germany Feb Import Prices y/y (exp -3.4%, prev -3.4%) Germany Feb Import Prices m/m (exp 0.6%, prev 0.6%) At 4:30:00 AM UK Q4 GDP est y/y (exp 1.7%, prev 1.7%) UK Q4 GDP est q/q (exp 0.%, prev 0%)
The dollar held to a tight range in Tokyo as Asian traders pondered the sharp movements in the US session following overnight remarks by Fed governor McDonough that the dollar is "theoretically" a little overvalued. Tuesday's whipsaw ride kept dealers away and trade is also likely to diminish this week as many Japanese investors sit on the sidelines ahead of the new fiscal year next week. USD/JPY hovered around 132.86 after finding support around 132.20 then 132.60 overnight, but gains were seen capped at overnight highs around 133.45. EUR/USD was unable to find much buying interest either after last week's failed attempt to break trendline resistance at 88.80 sent it to an overnight low of 87.33.
The fact that a Fed official even questioned the strong dollar was enough to cause a sharp decline in the greenback. But the dollar quickly recovered most of its losses in the wake of the strongest gain in consumer confidence in 25 years. Therefore, when worrying about the growing size of the US current account and the risk it poses to US assets and the strong dollar, it is important to remember that the driving force of that strength comes from dynamics of the US economy itself.
Yesterday's surge in US consumer confidence to 110.2 in March from the previous revised 95.0, defied forecasts for a smaller rise to 98.8. Moreover, the present situation index jumped to 111.5 in March from the previous revised 96.4, posting its largest 1-month jump in 25 years. That greatly overshadowed the weak present situation index of Germany's Ifo and certainly last week's drop in Italian consumer confidence for February It also underscores why Fed governor said "on a theoretical basis you can say the dollar is a little overvalued, but currencies can stay overvalued or undervalued for a long time," and why the current account deficit is likely to be financed for a number of years to come.
Markets will closely scrutinize the flow of foreign purchases of US corporate bonds-- which has replaced foreign direct investment and equity purchases as the balancing act of the US trade gap. But until the positive net investment position changes or the out-performance of US productivity ceases to be a factor, the dollar is likely to continue attracting the lion's share of excess savings. Therefore, some dealers viewed yesterday's sharp drop in the dollar as an opportunity to buy, especially since Japan's reform quagmire is expected to weigh on the yen in coming weeks and the euro has shown an inability to lead.
Moreover, interest rate expectations, which have held back the dollar in recent weeks, are subsiding and the market is increasingly focused on the shortcomings of the euro area and Japan this year.
EUR/USD trading around a day's low and support at 87.50 after gains were capped at 87.70. Overnight the pair slipped below 87.50 support to reach a 2-week low of 87.33. But only a break below key support at 87.10 would turn sentiment bearish again for the single currency after failing last week to break above its 200-day moving average at 88.62. Support is seen at 87.10 and 86.80, 86.30 and key support at 86.10. Resistance is seen at 87.70 and 88.20 and 88.60.
The Nikkei rose 1% today after four consecutive declines kept the yen under pressure as the market shifted its attention to the easing of foreign demand for Japanese shares along with expectations that Japanese investors would move their money back abroad next week after repatriating record amounts over the past couple months. This should keep pressure on the yen which on Monday fell to 3-week lows of 133.45 and 117.08 against the dollar and euro.
Traders anticipate the dollar to move onto a higher trading range against the yen of Y135-Y140 following the March 31 fiscal year end. USD/JPY hovering around 132.86 after finding support around 132.20 then 132.60 overnight. Resistance seen at 133.45 and 134.95.
GBP/USD held nicely within a familiar range yesterday as sterling again tested support at 1.4225 after failing to break above resistance at 1.4280. Prolonged rangebound action has put many traders on the sidelines, but dealers maintain that sterling looks heavy after failing to break key trendline resistance at 1.4320 last Thursday and the downside is now seen targeted. Support holds at 1.4220, 1.4205, 1.4175. A break of 1.4175, which marks the 61.8% retracement of the 1.4085 to 1.4323 move, would call upon support at 1.4085. Resistance is seen at 1.4285 and the upside should remain contained by trendline resistance at 1.4310 followed by a reaction high of 1.4323.