Currency Trading Update

The euro and US dollar face heavy event risk through Friday and into Monday morning:

01/30, 05:00 ET
Euro-zone Consumer Price Index Estimate (JAN) - Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a nearly 10-year low of 1.4 percent in January from 1.6 percent. Given European Central Bank President (ECB) Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 225 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on February 5, and weigh on the euro. On the other hand, if CPI does not fall further, the currency could gain as the markets assume the central bank will leave rates unchanged next month and wait until March to make monetary policy more accommodative.

01/30, 08:30 ET
US Gross Domestic Product (4Q A) - The 08:30 ET advanced reading of Q4 GDP for the US is forecasted to contract for the second straight quarter at a rate of -5.5 percent, which would mark the worst decline since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher despite the disappointing fundamental scenario.

02/02, 08:30 ET
US Personal Income, Personal Spending (DEC) - The release of personal income and personal spending figures for the month of December is likely to highlight the dismal status of consumption in the US. Income is forecasted to contract for the second consecutive month at a rate of 0.4 percent, and perhaps even worse, spending is anticipated to contract for the sixth straight month at a rate of 0.9 percent. The impact of the reports on the markets may be limited since Q4 GDP will have already been announced at that point, though deeply disappointing results could lead flight-to-safety to push the US dollar higher.

02/02, 10:00 ET
US Institute for Supply Management's (ISM) Manufacturing Index (JAN) - Unlike the releases of personal income and personal spending earlier in the morning, the ISM Manufacturing index will give a more timely view of conditions in the economy. The index is anticipated to fall to a nearly 29-year low of 32.6 in January from an upwardly revised 32.9. This would mark the twelfth straight month of contraction in business activity, suggesting that the recession could continue through at least the first half of 2009. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.

Terri Belkas
Currency Strategist
Forex Capital Markets LLC

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