US Dollar Gains Ahead of Heavy Event Risk

Source: Daily FX

The US dollar gained against most of the major currencies ahead of the market moving data scheduled for tomorrow, and pushed investors to lower their risk appetite as they raised bets of a 25bp rate cut. As a result, the greenback advanced against most of the commodity currencies expect for the Canadian dollar, which held up amid falling oil prices. The low yielding Yen also strengthened against the US dollar - sparked by a rise in risk aversion, while the Swiss franc inched lower to trade at 1.03. The European currencies continued to lose ground against the US dollar as negative sales data for the UK and Euro-Zone lowered the growth prospects for both countries and pulled back the British Pound and Euro to 1.96 and 1.55, respectively.

Fresh housing data lowered the growth prospects for the US economy as downside risks continued to surface, with more consumers voicing their concerns about the current economic situation. The S&P/CaseShiller Composite fell 12.7 percent, the sharpest decline since record keeping began in 2001. Financial instability paired with tightening credit conditions has made it increasingly difficult for the housing market to get back on its feet, with home prices persistently falling as the inventory of unsold homes reached record levels. Falling consumer confidence has also added damped the growth prospects for the economy as the Conference Board’s Consumer Confidence index fell for the fourth consecutive month to dip to a five year low of 62.3 from 64.5. Consumers continue to feel the economic strains as raging food and energy costs limit their spending capabilities, with growth prospects looking increasingly bleak as economic activity deteriorates.

Negative economic data sparked another round of bearish sentiment in the stock markets and dragged the markets into negative territory after early morning gains. As a result, the DJIA shaved 39.81 points to hold at 12,831.94 points, with pharmaceutical giant Merck taking the biggest loss. The broader S&P500 fell 5.43 points to 1,390.94 points, with 127 stocks falling to a new 52 week low.

The rise in risk aversion spurred increased demands for long-term US Treasuries, while demands for short-terms bonds wavered as the economic outlook for the US remains dreary. As a result, the benchmark 10-Year yield dropped to 3.823 percent from 3.831, while the 2-Year yield rose to 2.362 percent from 2.350.

Looking ahead, we expect heightened US Dollar volatility to follow early on in the morning as 1st quarter GDP figures are scheduled for release at 12:30 GMT, and expect annualized growth to inch lower to 0.4 percent from 0.6 percent. Following the release, our attention will be turned to the FOMC rate decision at 18:15 GMT, and forecast the central bank to lower key rates by 25bp to 2.00 percent.