The Forex Daily Digest – January 27, 2010

The GBP rose against the USD after an official from the Bank of England suggested that the British economy may have grown more in the fourth quarter than was initially estimated. Andrew Sentance, a member of the Bank of England's monetary-policy committee, said it will be difficult to keep inflation on target given the GBP’s depreciation against other major currencies. The USD stabilized against major currency pairs, touching its highest level in more than a month, on reports that China wanted to rein in bank lending and news that Japan's debt rating could be downgraded.

The JPY increased to a nine-month high against the EUR and strengthened versus the USD as speculation the global economic recovery is slowing spurred demand for Japan’s currency as a refuge. The JPY typically strengthens in times of financial turmoil as Japan’s trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders.

The AUD rose from near a one-month low against the USD after a government report showed consumer prices gained more than some economists had forecast, giving the central bank more reason to raise interest rates next week. The AUD also advanced against 14 of the 16 most-active currencies as the International Monetary Fund said Australia will outpace other advanced economies and expand 2.5 percent in 2010 and 3 percent next year.

People’s Bank of China Deputy Governor Zhu Min defended his country’s “stable” yuan policy and warned that USD volatility is threatening a global economic recovery. China is fighting criticism from countries, including the U.S., which it’s keeping the yuan’s value artificially low, making it more difficult for exporting nations to compete. China has kept a lid on its currency since July 2008 after it strengthened 21 percent against the USD over the previous three years.

The CAD fell, but mixed commodity and equity markets provided little direction and investors were hesitant to make big bets ahead of an interest rate decision by the U.S. Federal Reserve. Analysts said the policy and political landscape will likely keep investors cautious. Major events today include the rate announcement by the U.S. central bank as well as President Obama's State of the Union address at 9 pm (ET) this evening.

A professor from New York University said he has never been more pessimistic about the future of European monetary union. Professor Nouriel Roubini says that he believes Spain poses a real threat to the euro region. His concern contrasts drastically with the view of European Central Bank President Trichet who said it is “absurd” to imagine that the 16-nation euro area could fall apart. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.

Scheduled economic reports slated for release on Thursday are the Initial Jobless Claims report for the week of January 16, the December Durable Goods report. Some of the major companies scheduled to release their earnings include 3M, 1-800-Flowers, AT&T, Lockheed Martin, JetBlue Airways, Bristol-Myers, Eli Lilly, Motorola, US Airways, Raytheon, Amazon.com, and Microsoft.

Happy trading,

James Dicks