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Daily Report by Mellon Foreign Exchange
Daily Report by Mellon Foreign Exchange
Key Points - USD softens up a little further ahead of FOMC, but upside favoured after Tuesday. - JPY weakness continues despite ongoing build-up in short positioning. - UK PPI and CBI survey today’s data features.
Market Outlook The USD has been fairly soft overnight, but with one day to go to the FOMC meeting there is unlikely to be that much movement over the next 24 hours or so. EUR-USD moved off the main short-term supports last week and there may be some additional upside testing today given the fear that the Fed may signal a pause in tightening – this is the direction that liquidation risk would tend to threaten. However, this should be well contained, not least because it is as likely (more so we believe) they signal that rate hikes are not set to end just because a substantial amount of policy accommodation has been removed. 1.1900 should cap EUR-USD upside and downside is favoured after Tuesday, although how far that runs may depend in part upon the week’s data releases (retail sales, CPI, NY/Philly Fed surveys, trade deficit, Q3 balance of payments and the latest TIC portfolio report). The Fed statement and the implications this will have for general USD performance will mean that the market treads carefully on most crosses today.
One theme that has continued in Asian trading this morning has been the weakness of the JPY, which has fallen further against the EUR and GBP and resumed its fall against the AUD and the NZD. A further round of JPY weakness looks likely going into year-end given the lack of any prospects about a BoJ rate hike. This week’s Tankan survey is unlikely to be strong enough to change this scenario. USD-JPY needs to break above 121.40 to suggest an extension higher and this is favoured after Tuesday’s FOMC meeting.
The only constraint to further JPY weakness is the extent to which short positioning has already built up, with net longs on USD-JPY for IMM specs reaching a fresh high as of last Tuesday. However, such is the strength of the current theme it is unlikely that this is going to unwind just yet.
Day Ahead UK – PPI data and the latest CBI survey are due today. Last month there was a sharp fall in the y/y rate on core output prices, basically because of a dramatic reversal in fortune compared to what happened in October last year. It will be interesting to see how much of this has been sustained. The CBI survey has been consistent with soft activity in the manufacturing sector for much of this year. Last month’s survey showed a drop in the output balance while orders and price balances were also subdued. It seems unlikely that today’s data will have any major influence on MPC policy expectations.
Diary Data/event BST Consensus* GB PPI input (Nov) m/m 09.30 -0.3% GB PPI output (Nov) m/m 09.30 0.0% GB PPI output core (Nov) y/y 09.30 1.3% GB ODPM house prices (Oct) y/y 09.30 3.1% GB CBI manu trends survey (Dec) 11.00 US Federal budget balance (Nov) 19.00 -$76.5bn
Latest data Actual Consensus* JP Domestic CGPI (Nov) y/y 1.9% 1.9% JP Current account (Nov, sa) ?1.67trn ?1.4trn CN CPI (Nov) y/y 1.3% 1.4% * Consensus unless stated
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