Dukascopy Daily Forex Overview

Previous session overview
The euro shot up to a new two-week high against the dollar on Wednesday within reach of its lifetime record, after the Federal Open Market Committee voted to cut its lending rates by 50 basis points.

The euro passed $1.4900 - a key technical barrier, just more than a half cent shy of its all-time high of $1.4968, reached Nov. 23, 2007. Its session high was $1.4910. Leading up the Federal Reserve interest rate decision, the EUR/USD had been trapped within a tight 100 point trading range, but as soon as the Federal Reserve announced the larger rate cut, the Euro skyrocketed. Euro zone interest rates are now 100bp higher than US rates.

GDP grew by just 0.6% annualized in Q4, less than the median forecast of 1.2%. The biggest downside surprise was a relatively rare run-down in inventories which, coming after solid stock-building in Q3, meant that component shaved a steep 1.25 ppts off the GDP bottom line.

The British pound had a nice rally last week, but the strength of the currency pair is fading. The pound dipped after UK new mortgages rose just 73k in December, the lowest reading this decade, providing more evidence of a slower UK household sector.

The Japanese Yen crosses tried to hold onto their gains following the Fed's interest rate cut, but they failed to do so as the 185 point post FOMC rally in the Dow turned into a 37 point loss.

The Australian dollar ended a roller coaster session higher on Thursday, reversing an early surge after the U.S. Federal Reserve again slashed interest rates.The Canadian, Australian and New Zealand dollars continued to extend their gains despite a retracement in gold prices and a marginal rise in oil prices.

Market expectation
ECB rates are expected to remain steady, but US rates will come down further, which is why the EUR/USD could make a run for its all time high.

The immediate technical picture for the dollar will be further weakness versus the euro.

Today, we expect the December trade balance to improve to a $150m trade deficit.

Housing market data from the UK continues to disappoint with consumer credit and mortgage approvals falling short of expectations. Nationwide house prices are due for release and we expect this housing market indicator to continue to reflect the overall vulnerability of the sector.

Expect the currency to benefit from risk aversion as investors dump risk positions in high-yielding currencies in favor of low-risk, low-return currencies such as the yen.