FOREX: US Dollar May Slip on Risk Appetite, German CPI on Tap

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2010/12/29/FOREX_US_Dollar_May_Slip_on_Risk_Appetite_German_CPI_on_Tap.html

Key Overnight Developments

• Currencies Drift Sideways as FX Markets Consolidate in Overnight Trade
• Risk Appetite Firms in Asia Despite Drop in US Consumer Confidence

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3048	1.3239
GBPUSD	1.5324	1.5491

The Euro and the British Pound were locked in narrow ranges in overnight trade, with the single currency oscillating near the 1.31 figure and sterling drifting sideways below 1.54 to the US Dollar. We remain short EURUSD and long USDJPY.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
		No Data

Currency markets were at a near-standstill in overnight trade, with the majors locked in tight ranges digesting the indecisive volatility noted over the preceding 24 hours. Indeed, the US Dollar had dropped as much as 0.8 percent on average against its top counterparts from yesterday’s Asia session through midday in New York only to recover in the subsequent hours to begin today with narrow 0.04 percent net gain. Most significantly, these wild swings did not seem linked to any specific catalyst, owing more to the volatility-amplifying effects of thin liquidity around the holiday period than anything tangible.

The trend behind risk sentiment seems equally conflicted, with stocks moving higher across Asian exchanges despite an unexpected drop in US Consumer Confidence. The MSCI Asia Pacific regional benchmark equity index added 0.6 percent, with energy-linked shares outperforming after oil and gas prices advanced.

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
EUR	-	German Consumer Price Index (MoM) (DEC P)	0.9%	0.1%	Medium
EUR	-	German Consumer Price Index (YoY) (DEC P)	1.5%	1.5%	Medium
EUR	-	German CPI - EU Harmonised (MoM) (DEC P)	0.9%	0.1%	Medium
EUR	-	German CPI - EU Harmonised (YoY) (DEC P)	1.6%	1.6%	Medium
EUR	9:00	Euro-Zone M3 s.a. (3M) (NOV)	1.2%	1.1%	Low
EUR	9:00	Euro-Zone M3 s.a. (YoY) (NOV)	1.6%	1.0%	Low
GBP	9:30	Bank of England Housing Equity Withdrawal (3Q)	-£6.0B	-£6.2B	Low
CHF	10:30	KOF Swiss Leading Indicator (DEC)	2.1	2.12	Medium

German Consumer Price Index figures are set to show the annual inflation rate held at 1.5 percent in December, matching a two-year high recorded in the previous month. The report may pass without much fanfare however considering the reading is unlikely to carry significant implications about the direction of interest rates. Indeed, a print in line with expectations would put inflation still comfortably below the European Central Bank’s target 2 percent, not to mention that Jean-Claude Trichet and company are hardly in a position to tighten monetary policy as the Euro Zone debt crisis continues to fester.

Sizing up sentiment, European and US stock index futures are tracking higher in late Asian trade, hinting risk appetite is to be well supported and hinting at losses for the safety-linked US Dollar. With that said, even the most established relationships can’t be assumed to be reliable given current liquidity conditions, making for an ultimately uncertain outlook.

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