Forex Traders Should Expect US Dollar Price Action to Remain Range-bound Through Friday

• Euro Holds Near Record Highs Versus British Pound, Both Remain Under Pressure Against US Dollar
• Japanese Yen Mixed Across the Majors as Volatility Cools and Liquidity Falls, Industrial Production Expected to Plunge by Record

Forex Traders Should Expect US Dollar Price Action to Remain Range-bound Through Friday

The US dollar has done little but consolidate its gains from December 18 and 19 since the start of the week, and this is likely to remain the case through Friday as trading volumes are bound to remain low. This has been the case for the stock markets as well, as the Dow Jones Industrial Average has barely budged from a channel formation with a current range of approximately 8,370 - 9,000. All of this subdued price action came despite a series of releases that may have been market-moving under different circumstances. Indeed, personal income slumped 0.2 percent during the month of November, as deteriorating labor market conditions drive wages lower, while personal spending contracted for the fifth straight month at a rate of -0.6 percent. Such a decline in spending isn't entirely surprising given the latest US GDP figures for Q3, which reflected a 3.8 percent plunge in consumption, but does suggest that Q4 GDP results will be similarly disappointing. Meanwhile, US initial jobless claims for the week of December 20 climbed to 586K from 556K, while continuing jobless claims for the week of December 13 edged down to 4370K from 4387K. Nevertheless, both of these indexes remain near the highest levels since late-1982, highlighting one of the primary reasons why consumption has fallen so steadily in 2008. On the flip side, US durable goods orders were not quite as bad as expected, thanks to a surprise pick up in defense spending and signs of improvement in business investment. Overall though, it will take more than one better-than-expected release to change the rather gloomy outlook for the US economy.

Euro Holds Near Record Highs Versus British Pound, Both Remain Under Pressure Against US Dollar

The euro continues to trade near record highs versus the British pound, as the pair has done little but consolidate below 0.9500/50. On the flip side, the individual currencies have gone relatively unchanged versus the US dollar, leaving EUR/USD to consolidate below 1.40 while GBP/USD has drifted down toward support at 1.4650. The moves came following the release of disappointing UK GDP revisions on Tuesday, as the economy actually contracted 0.6 percent during Q3 compared to initial estimates of a 0.5 percent contraction. The GDP figures confirm that the UK fell into recession for the first time since 1990-1991 as a result of the sharpest drop in consumer spending since 1995 and a decline in investment as the financial crisis took its toll. The Bank of England has already cut rates to 2.00 percent, the lowest since 1951, but this data only adds to speculation that they will reduce the Bank Rate by another 50bps in January. As a result, the odds remain in favor of further declines for the British pound, especially against the euro.

Japanese Yen Mixed Across the Majors as Volatility Cools and Liquidity Falls, Industrial Production Expected to Plunge by Record

The Japanese yen traded mixed across the majors, rising very slightly against the British pound and US dollar while falling versus the New Zealand dollar, Canadian dollar, and Swiss franc. Given the lower volumes associated with holiday trading, as well as a significant drop in financial market volatility as indicated by declines in the CBOE’s VIX volatility index over the past month or so, much of the fuel behind the Japanese yen’s past gains have been eliminated. This is surely comforting to the Bank of Japan, as the appreciation of the currency has been extremely detrimental for the Japanese economy. However, this does not mean that Japan will not attempt to intervene in the currency markets, as the yen remains historically high. Indeed, if there is a good time for the country to step in to physically drive the currency down, this may be it.

Looking ahead, the Japanese economy fell into recession during Q2 and Q3 of 2008, and upcoming data is likely to indicate that it extended into Q4 as well. Industrial production for the month of November is forecasted to fall by 6.8 percent, bringing the annual measure down to a record low of -15.0 percent. Manufacturers are feeling the impact of a slowing in domestic demand, as well as foreign demand, which has only been exacerbated by the rapid appreciation of the Japanese yen. Individual economic releases don’t tend to have a huge impact on the Japanese yen, but this is still an indicator that may be worth watching.

DailyFX

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