Overall confidence in the global economy is likely to remain slightly weaker in the short-term with expectations that monetary and fiscal policies will not be able to provide as much support over the next few months. In this environment the dollar should be able to gain some defensive support while confidence in the Euro-zone economy is likely to remain generally weak.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Friday January 30th
|
13.30
|
US GDP (advance Q4)
|
Thursday February 4th
|
12.00
|
UK interest rate decision
|
Thursday February 4th
|
12.45
|
ECB interest rate decision
|
Friday February 5th
|
13.30
|
US employment data
|
Dollar:
There will be expectations of a firmer US economy, especially if there is a robust reading for fourth-quarter growth. There will still be expectations that the Fed will be very cautious over raising interest rates and confidence in the economy could also falter very quickly given underlying vulnerability. The dollar will gain some support on defensive grounds if there is a further deterioration in risk appetite. The US currency will also gain some support on a lack of confidence in the other key currencies. Weak dollar fundamentals will continue to limit the scope for gains.
The dollar maintained a firm tone during the week as defensive demand persisted on a lack of confidence in other major currencies. The US currency tested six-month highs below 1.40 against the Euro with a peak near 1.3910 on Friday.
Developments surrounding Fed Chairman Bernanke’s nomination for a second term continued to be watched closely There was also some speculation that there would be an informal pact for Bernanke to pledge low interest rates in return for Senators supporting his nomination.
In the event, Bernanke was confirmed for a second term in a Senate vote on Thursday This eased market uncertainty over the Fed situation and provided some degree of relief to equity markets.
The existing home sales data was weaker than expected with a drop to an annualised rate of 5.45mn for December from 6.45mn the previous month, but prices rose and inventories declined which should provide some support early in 2010.
New home sales also declined to an annual rate of 342,000 for December following a revised figure of 370,000 the previous month. There was evidence that sales demand triggered by tax credits was fading which tended to undermine overall sales.
Other housing data was mixed with the national data recording a small increase in prices for November, while the Case-Shiller data suggested that momentum was stalling with prices edging lower for November and October.
The latest consumer confidence data was stronger than expected with a 16-month high of 55.9 for January from a revised 53.6 the previous month. Jobless claims only declined to 470,000 in the latest week from a revised 478,000 previously.
Headline durable goods rose 0.3% for December which was well below consensus expectations while there was a 0.9% underlying increase for the month. Underlying confidence in the economy remained fragile with continuing fears over the durability of the current recovery.
As expected, the Federal Reserve left interest rates in the 0.00 - 0.25% range following the latest meeting. The Fed adopted a slightly more optimistic tone towards the economy, but was still very cautious over underlying trends. The Fed also maintained the commitment to maintaining low interest rates for an extended period while there was a promise to gradually withdraw quantitative measures.
The vote was not unanimous as Regional Fed Governor Hoenig dissented with a preference for the extended period references to be removed. The majority will hold sway in the short-term, but there was some speculation over further calls for a less aggressive policy which provided some limited dollar support. |