Divergence, Risk, & Volatility

The USD started Tuesday on a stronger footing versus the EUR and GBP, but as the day went by the EUR began to gain once again and continues to sustain strength. On the other hand the GBP kept struggling because of a negative GDP report. While the U.S. turned in a good CB Consumer Sentiment report with an outcome of 60.6 compared to the estimate of 54.4, the S&P/CS Composite-20 HPI came in like a ton of bricks with a decline of -1.6% and the report indicated that housing prices will continue to falter. Thus the stronger Consumer Sentiment was not able to muster sufficient impetus and Wall Street turned slightly negative. The decline in the equities must be taken into the context however that profit taking may have taken place as traders booked their winnings. Thus today, the morning after President Obama’s State of the Union speech, will be an interesting reflection on where risk sentiment stands particularly since the President tried to extend an olive branch to the Republicans regarding government spending.

The Federal Reserve will release their FOMC Statement today. The Fed began holding their monetary policy meetings yesterday and investors will be keen to see how the economy is described and what the Fed’s long term outlook is. Quantitative easing, inflation, and the unemployment situation are likely to find some type of mentions in the report. No new surprises are expected today, but investors will certainly be able to examine the tone of the wording. The U.S. will also release New Home Sales numbers today and a result of 302k is expected. Simply put as long as housing prices and unemployment remain strained the American economy is going to have a tough time rebounding in a strong manner. While consumers seem to be showing some pent up purchasing desires the question is just how much money they really can spend. Tomorrow weekly Unemployment Claims will be presented along with Durable Goods figures and Friday will see the Advance GDP statistics from the States. Thus, there is plenty of important news and data coming from the States, the Fed’s FOMC report will be front and center for investors today. The USD has been weaker against the EUR the past two weeks and risk appetite must be gauged via equities and bonds.

The EUR and GBP had an interesting Tuesday. The EUR started off slightly weaker against the greenback, but managed to find renewed vigor. The GBP found a negative GDP report via the Preliminary report with an unexpected decline of -0.5% outcome compared to the estimated gain of 0.5%. The report clearly shows that the U.K. economy is struggling. While many expressed the notion that bad weather in December hurt consumer spending in the U.K., it must be noted that the economy remains skittish enough that a couple of bad snow storms were able to cause so much harm. And this is a picture that relates to Europe as well. Its Sovereign Debt story has not gone away by any means and a simple bump could cause fireworks down the road. While the EUR has done remarkably well the past few weeks, Spain has been issuing new mandates regarding its banks without much fanfare. The U.K. will release it MPC Meeting Minutes report today, but no surprises are expected. The question today will be too see if the EUR and GBP can reemerge as currencies that trade within the same risk sphere. The divergence that was seen yesterday will have to be monitored closely.

The JPY did gain against the USD on Tuesday as Asian equity markets had a positive day of trading. The JPY has been leaning on the stronger side of its range versus the USD for quite some time and has recently started to near its high water marks. The temptation that risk appetite may be coming back onto the table however could leave traders with the belief that the JPY may continue to experience its known ranges. The AUD remains at an interesting juncture as it shows strength even as the price of Gold has been under pressure the past week. The AUD is not at all time highs, but it remains within the upper reaches of its value. There are plenty of opportunities for traders going into today’s trading sessions and volatility remains a distinct possibility.