Daily Forex Analysis by Finexo.com 24/02/2010

Past Events:

• USD Consumer Confidence out at 46.0, versus expected 55.0, prior 56.5
• USD S&P/CS Composite -20HPI y/y out at -3.1%, versus expected -3.0% and -5.3%
• EUR German Ifo Business Climate out at 95.2, versus expected 96.2, prior 95.8
• EUR GfK German Consumer Climate out at 3.2 versus expected 3.1, prior 3.3

Upcoming sessions:

• EUR Industrial New Orders m/m (100GMT)
• USD Fed Chairman Bernanke Testifies (1500GMT)
• USD New Homes Sales (1500GMT)
• AUD Private Capital expenditure q/q (tomorrow 0030GMT)

Market Commentary:

Consumer confidence in the U.S fell sharply in February, plugging to its lowest level since April 2009. After reaching a 16-month high, of an upwardly revised of 56.6 this past January, the CB Consumer Confidence index sank a record 11 points to 56.0, as Americans turned more pessimistic about job prospects and the U.S economy.

For the seventh consecutive month, home prices in 20 U.S cities rose in December, signaling that the housing prices, concerned to be at the center of the worse economic recession since the Great Depression, are begin to stabilize. Yesterday’s S&P/Case-Shiller Indexes showed that home prices increased 0.3% from the previous month on a seasonally adjusted basis- increasing more than expected, and matching gains seen in last November. While the index reports that housing prices were down 3.1% from December 2008, this decrease is has been the smallest yearly change seen since May of 2007. The S&P/Case-Shiller indicator came one day ahead of New Homes report. Two months ago, this leading indicator took a dive, plugging to a new low showing everybody that the housing sector is heavily depended on government aid- since then, it has not been able to return to its previous levels. Last month’s low number of new homes sales is predicted to be followed by a slight increase this month, analyst predict sales to edge up to 354K. While the New Homes sales indicator generally has a big impact on the market, the report will most likely be overshadowed by Bernanke’s testimony.

Despite a drastic fall in consumer confidence yesterday, the greenback was able to maintain its bearish trend against its European counterpart, hitting as low as 1.34952. Although throughout the course of the day, the highly traded currency pair managed to bounce back slightly, the closing at 1.35118, down 0.65% from its opening daily price of 1.36001. Conversely, the greenback dropped a total of 1.09% against the Yen as investors flocked to the safe haven status of the Japanese currency in trading sessions yesterday. The USD/JPY plugged a drastic 1.4% before leveling out and closing at 90.194.

With the most significant economic indicators being released today revolving around the U.S. economy; the Dollar is likely to see some heavy volatility against its major currency counterparts, especially against the Euro and Yen.

Today investors will want to pay careful attention as US Federal Reserve Chairman Ben Bernanke is set to begin his two will begin his two day annual Humphrey-Hawkins testimony on monetary policy before Congress. In anticipation of the speech, the dollar index, which measure the US unite against a trade-weighted basket of six major currencies, fell to 80.788 in today’s Asian afternoon session from 80.874 in late North American trading Tuesday. Following last Thursday’s unexpected rate hike for emergency bank loans, anticipation is high for any new news regarding the state of the U.S. economy. Positive sentiment will likely lead to major gains for the greenback, while If Bernanke’s statement “discourage an early monetary tightening policy” the dollar may likely be forced to forfeit some of last week’s heavy gains.

For the first time in 11 months, German business confidence unexpectedly fell in February, taking a turn for the worse as the coldest winter in 14 years had a damaging effect on both retail sales and construction. Yesterday’s Ifo Business Climate report, based on a survey of 7,000 executives, came in below the expected report of 96.2, slipping to 95.2 from January’s 95.8. Germany’s recovery from the worst recession post World War II, braked in the final quarter of 2009, as domestic spending fell. Below seasonal temperatures have brought construction sites to a freeze, pushing companies to hold back in hiring, thus having a negative impact on household spending.

The German business sentiment index is closely watched as an early leading indicator of current conditions and business expectations in Germany – positive economic growth anticipates bullish movements for the EUR, while a low reading is seen as negative, and can have a bearish impact on the currency. The euro eased to $1.3629 (at 11 a.m. in Frankfurt) from $1.3679 before the report was published.

Early this morning, Germany release its GfK German Consumer Climate, a survey based on 2,000 consumers, fell to 3.2 for March from a revised 3.3 in February, the fifth consecutive monthly drop for the forward-looking indicator.

After a series of European economic indicators came in below expectations yesterday, the EUR saw losses across the board. The EUR/GBP dropped over 0.65% over the course of yesterday’s trading sessions. Investors have yet to show much confidence in the Greek bailout plan, and following yesterday’s disappointing news, all signs appear to be bearish for the ailing currency. Today, traders are recommended to pay attention to the Industrial New Orders report (1000GMT)-the report is a leading indicator of production, and could provide a clear look at the current state of the Euro-Zone economies.

The British pound is at the edge of falling to a new 9 month low against the U.S. dollar, closing yesterday at 1.53918. There was no U.K. economic data released yesterday, expect the dovish comments from Bank of England officials confirming fear that the pound could be the worst performing G7 currency this quarter. In Yesterday’s inflation report hearings, the Bank of England Governor Mervyn King said that official officials are prepared to do “whatever seems appropriate” to prevent a relapse in the U.K.’s economic recovery. In his opening statement, King said that while economy has begun to heal and process will take time. The crisis left many serious challenges in the economy, including how to reform the international financial system as well as how to reduce largest peace-time fiscal deficit and how to restructure the banking and financial system to prevent another, more serious, crisis in future.

Central bank officials also went to great lengths to talk about how a lower sterling will boost growth, sending a clear message that the BoE is banking on a weak currency which suggests that they will artificially try and keep the currency at its current record low levels.

The U.K. economy is entering a “very grave stage” and the Bank of England should expand its 200 billion-pound ($308 billion) bond-buying plan to fight the risk of a relapse, former Treasury adviser Roger Bootle said yesterday. However, UK officials put the asset buying program on ice this month in order to better gage the strength of the recovery, as they feel that the effect of the quantitative easing measures have yet to be fully seen. The Pound closed down 0.575% against the greenback (at $1.54808).

Written by Finexo.com