Euro Falls on Profit-taking; Investor Focus Shifts to U.S. Economic Data

The U.S. Dollar is gaining back a little of yesterday’s loss in light, overnight trading. Volume continues to be down because of the week-long Chinese holiday celebration.

The U.S. Dollar is gaining back a little of yesterday’s loss in light, overnight trading. Volume continues to be down because of the week-long Chinese holiday celebration. Investors seem a little reluctant to take on risk ahead of today’s U.S. economic reports. Early in the session, traders will be focusing on U.S. Housing Starts and Industrial Production Reports. Later in the day, their focus will shift to the FOMC Minutes.

U.S. Housing Starts are expected to show an annual pace of 580K. This is up from last month’s 557K. Building Permits are expected to drop to 620K from 653K. Despite the mixed news, homebuilders remain optimistic.

Industrial Production is expected to show a 0.6% rise. Capacity Utilization should come in at 72%. Traders will be watching to see if manufacturing shows an increase after a recent decline.

Both the Housing Starts and Industrial Production reports could underpin the Dollar today if they come in better than expected.

The key report to watch today is the late session FOMC Minutes. Today’s economic reports represent stale data while the FOMC minutes will offer traders an outlook for future policy moves by the Federal Reserve.

The FOMC Minutes are expected to say the U.S. economy is recovering. The focus, however, will be on the comments from Federal Reserve Bank of Kansas City President Thomas Hoenig.

At the last Fed FOMC meeting Hoenig was the lone dissenting vote. He basically wanted the Fed to change a portion of the language of the report to represent a more hawkish attitude. His premise for the change was based on his perception of a much higher inflationary outlook. He also felt that the government should cut spending and increase revenue to stave off the next crisis. Investors will be looking to see if any other Fed member feels the same way about the economy.

Investors will also be looking to see if the Fed stands ready to absorb excess liquidity in the market. Look for the Dollar to gain if the message indicates a strengthening economy. If the Fed’s message is too optimistic then the Dollar may weaken against commodity related currencies because of increased appetite for risk.

The EUR USD is trading lower on profit-taking and some light new short-selling pressure. Yesterday’s rally was most likely short-covering rather than new buying as traders continue to take a wait-and-see attitude toward the developments between the European Union and Greece.

A huge amount of short Euro traders continue to dominate the market. On Tuesday, some of those shorts lightened up their positions after Greek Finance Minister George Papaconstantinou said that the nation will not need a bailout. Some traders feel that the worst of the Greek deficit situation has passed and that a floor has been put in the Euro market.

The GBP USD is under pressure overnight. The release of the dovish Bank of England minutes helped trigger a sell-off early in the trading session. British Pound investors remain bearish on the currency because the BoE recently voted to suspend its asset purchase program, kept interest rates low at 0.50%, and felt there was “no immediate need” to expand monetary policy further as the economy emerges from the recession.

The outlook for the economy remains bleak. The BoE said the U.K. economy is “recovering, but weakly”. It also emphasized the economy faces “considerable” headwinds as they expect credit conditions to remain tight “for some time”. Finally, the BoE sees no “overwhelming risk” from inflation to undershoot the 2% target and that inflation may also be temporarily higher because of the stimulus measures.

The poor economic outlook is the driving force behind a weaker British Pound over the long-run. In addition, traders remain pessimistic about U.K. budget issues. A rally in the Euro may trigger a short-covering rally over the near-term, however.

Expectations of solid U.S. economic data this morning is helping to support the USD JPY. Commodity-linked currencies such as the Canadian Dollar, Australian Dollar and New Zealand Dollar are showing mixed results. Gold and Crude Oil should be the catalyst behind the moves in the Canadian Dollar. Australian and New Zealand Dollar traders will be focusing on greater demand for higher yielding assets and the strength or weakness in the U.S. equity markets.