FX news and analysis 26th Jan

USD

The dollar weakened further on Thursday as a result of the Fed's dovish assessment of the economy at the FOMC and its pledge to keep interest rates at extreme lows until 2014, putting off yield seeking investors from investing in dollar assets. There were also renewed fears the Fed would institute another round of quantitative easing in the second half of 2012. The accompanying statement characterised recent growth as 'moderate' but underplayed the improving run of positive data: “The unemployment rate remains elevated. Household spending has continued to advance but growth in fixed investment has slowed, and housing sector remains depressed.” The dollar fell extremely rapidly after the FOMC and some fear it is in the process of changing trend. Other data showed that Durable Goods Orders beat expectations of a 2.0% rise by increasing by 3.0% in December. Continuing Claims and New Jobless Claims both rose by more than expected to 3554k vs 3500k and 377k vs 370k respectively. Finally, New Home Sales fell by -2.2% versus the 1.9% expected growth – as if to underline the cautionary tone of the Fed's FOMC statement.

EUR

The euro rose after safe-haven currencies weakened – particularly the dollar - following QE3 fears, low expectations for the Fed's funds rate and the persistently dovish tone of the FOMC's accompanying statement. The euro also gained ground versus the yen after the country posted its first trade deficit for years, stoking fears that it might not be able to self-finance in the future, thus reducing its appeal to haven-seeking investors. There was also support after private investors shifted their position in debt swap talks, accepting a lower interest rate on new issues, although a deal has still to be struck. It was news from the bond markets, however, which really underpinned the advance as Italy successfully sold 5bn of short-term debt despite the S&P's recent 2-notch downgrade. Yields dropped to 3.76% on the 2014 bonds, their lowest since August. Longer-dated action showed the10-year yield dropping to 6.09%, well below the 7% danger level. On the data front German Consumer Confidence grew optimistic, posting a 5.9 print versus the 5.6 expected and 5.7 previous.

GBP

The pound posted its 9th straight up-day in a row, against both the dollar and the yen, despite rubbish data which showed a worse than expected result in CBI Reported Sales of -22 versus estimates of -6 and a previous print of 9. This too after Tuesday's poor GDP print and dovish commentary from Governor King. The 'least' ugly effect appears to be helping as well as signs that the government has public spending under control following yesterday's fall in Public Spending figures. The pound may also be benefiting from safe-haven flows as gilts remain a safe bet – again in comparison to other sovereigns. This may have become particularly pronounced since Japan posted its first trade deficit for 31 years and the FOMC dampened the outlook for the dollar. Whilst much of the displaced safety flow may be using gold as its 'release valve', there may also be a subset of investors opting for sterling denominated assets too.

JPY

The yen had a mixed day on Thursday – with the rally in risk extending initially to make new highs but then the day ending with a reversal and the yen appreciating again into the evening. Many pairs reached over-bought levels making a pull-back inevitable as traders took profits on their positions. Concerns over the Greek debt swap deal could also have rattled risk appetite given they have still inconclusive. Another factor may have been the rebalancing after yesterday's dramatic sell-off - for whilst the trade deficit figures were worrying they were heavily influenced by the tsunami, which was a one-off event. Nevertheless the longer-term legacy could weigh on Japan's balance sheet and lead to the years of easy surpluses being a thing of the past. 30% of Japan's power came from nuclear pre-tsunami which is now down to 0.8%. The reliance on imported fuels may cost dear. On the data front it was a quiet day with most data expected in the Asian session tonight, when the focus will be on Retail Sales, which are expected to have rise by 2.1% compared to a fall of -2.2% previously and the minutes of the BOJ meeting.