The dollar traded in range versus the euro on Thursday, as the market remains cautious before the employment report from the US Labor Department to be released on Friday.

The dollar was little changed after a run of US data due 08:30 EST this morning. Weekly jobless claims fell from 325k to 307k, better than the estimate of 318k. Personal spending and income increased 0.7% and 0.5% respectively as expected. Core consumer prices rose 0.1% in December after being unchanged in the previous month.

Like yesterday, it is the manufacturing data that moved the market today. The dollar dipped in a knee-jerk reaction to the weak-than-expected ISM index, but bounced back quickly. US manufacturing ISM fell from 51.4 to 49.3 in January.

US non-farm payrolls are forecasted to fall from 167k to 148k in January. Also the market will look at the revision to the previous reading.

GBPUSD encounters interim resistance at 1.97, backed by 1.9740, and 1.9770. Subsequent ceilings will emerge at 1.98, followed by 1.9850 and 1.9880. On the downside, support begins at 1.9650, followed by 1.9620 and 1.96. Additional floors are eyed at 1.9570, backed by 1.9550 and 1.95.

EURUSD will face interim resistance at 1.3050, followed by 1.3070 and 1.31. Additional ceilings will emerge at 1.3130, backed by 1.3150. Support starts at 1.30, backed by 1.2970, 1.2950 and 1.2920. Subsequent floors are eyed at 1.29.

Yen Steadies below 121

The yen yesterday strengthened from lows significantly after US Treasury Secretary Henry Paulson said he was watching the Japanese yen very carefully. The currency stays firm below 121 against the dollar. The market is waiting to see whether the G7 meeting to be held next week in Germany is going to focus on yen weakness.

USDJPY encounters interim resistance at 121, backed by 121.10 and 121.30. Subsequent ceilings will emerge at 121.50, followed by 121.70. On the downside, support begins at 120.60 and 120.40, followed by 120. Additional floors are eyed at 119.70, backed by and 119.50.

At 4:00 AM January Eurozone Manufacturing PMI (exp 56.2, prev 56.5) At 4:30 AM UK January Manufacturing PMI (exp 51.7, prev 51.9) At 8:30 AM US December Personal Income (exp 0.5%, prev 0.3%) US Weekly Jobless Claims (exp 318k , prev 325k) US December core PCE m/m (exp 0.2%, prev 0.0%) December core PCE y/y (exp n/f, prev 2.2%) US December Personal Spending (exp 0.7%, prev 0.5%) US December Personal Income (exp 0.5%, prev 0.3%) At 10:00 AM US January Manufacturing ISM (exp 51.4, prev 51.4)

The dollar remains softer against the majors following yesterday’s weaker-than-expected Chicago manufacturing PMI report, which revealed contraction in January to 48.8. Despite optimism in both the Q4 GDP, which posted a robust gain to 3.5% from 2.0%, and a more upbeat assessment of the economy from the FOMC statement – traders focused instead on a combination of bleak manufacturing data and comments from US Treasury Secretary Paulson about carefully monitoring yen weakness. Paulson effectively offset last Friday’s comments from Treasury Undersecretary Adams, in which he defended the Bank of Japan’s decision to leave policy unchanged, citing soft spots in their economy and suggested the US would not back a change in the communiqué. However, traders will now proceed with caution leading up to the G7 Finance Ministers meeting to take place on Feb 9-10, wary about the prospect of a coordinated statement against artificially weak currencies.

The FOMC was more upbeat in its assessment of the economy, as revealed by its statement. The Fed acknowledged firmer economic growth and “tentative signs of stabilization” in the housing market, anticipating moderate growth in the upcoming months. The Board cited high levels of resource utilization as a potential risk to inflationary pressure, thus maintaining its hawkish bias.

In the session ahead, traders will continue to digest additional reports to assess inflationary and manufacturing conditions. The December core PCE is seen edging up slightly to 0.2%, up from a flat reading in the previous month. The January manufacturing ISM figure is forecasted to remain unchanged at 51.4 versus a month earlier. However, yesterday’s unexpectedly sharp drop in the Chicago PMI bodes poorly for today’s manufacturing figure, particularly given the PMI’s dip into contraction. On the prospect of a sharp drop in manufacturing ISM to beneath the key 50-level, we anticipate more aggressive selling of the greenback.

A glance at the trade-weighted US dollar index (USDX) daily chart reveals further losses to come given its recent inability to overcome the 85.5-level, marking a possible double top formation. The MACD also provides further confirmation of a potential top following a recent crossover, indicative of a move lower. Initial target on the downside will be 83.5. We view the greenback’s ascent since the first week of December last year to be losing steam and anticipate a gradual decline in the dollar over the coming months.

The dollar weakened broadly on Wednesday after Chicago PMI index fell from 51.6 to 48.8 in January, far below the estimate of 52. A reading below 50 indicates the manufacturing activity contraction. The construction spending declined 0.4% in December, also worse than the previous reading of ¨C0.2% and a forecast of 0.0%. The dollar pared its gains following the weak manufacturing report. The euro climbed to above 1.30 versus the dollar and the sterling also rose to around 1.9630.

Earlier in the morning, the dollar strengthened versus the sterling and yen after a government report showed the economy expanded at a faster pace than expected. US advance GDP rose from 2.0% to an annual rate of 3.5% in the fourth quarter, beating the estimate of 3.0%. US employment cost index declined slight to 0.8% from 1.0% in the previous quarter.

The dollar fell further versus its major rivals after the FOMC decision announcement in the afternoon. The Fed decided to leave the interest rates unchanged at 5.25% as expected and reiterated that some inflation risks remain. The FOMC statement said that the extent and timing of any additional firming will depend on the evolution of the outlook for both inflation and economic growth. The Fed did not provide any fresh views of the rate outlook and their monetary policy will still be data driven.
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GBPUSD encounters interim resistance at 1.9650, backed by 1.9670, and 1.97. Subsequent ceilings will emerge at 1.9730, followed by 1.9750 and 1.9780. On the downside, support begins at 1.9630, followed by 1.96 and 1.9560. Additional floors are eyed at 1.9520, backed by 1.95 and 1.9480.

EURUSD will face interim resistance at 1.3050, followed by 1.3070 and 1.31. Additional ceilings will emerge at 1.3130, backed by 1.3150. Support starts at 1.30, backed by 1.2970, 1.2950 and 1.2920. Subsequent floors are eyed at 1.29.

Yen Rebounded After Paulson's Remarks

The yen rebounded from lows significantly after US Treasury Secretary Henry Paulson said he is watching the Japanese yen very carefully. The dollar slid from 121.30 to a new session low at 120.64 versus the yen in a knee-jerk reaction. The sterling and the euro slumped to session lows at 236.40 and 156.80 versus the yen respectively at the same time.

USDJPY encounters interim resistance at 121, backed by 121.10 and 121.30. Subsequent ceilings will emerge at 121.50, followed by 121.70. On the downside, support begins at 120.60 and 120.40, followed by 120. Additional floors are eyed at 119.70, backed by and 119.50.

At 2:00 AM December Germany Retail Sales m/m (exp 1.5%, prev –0.7%) December Germany Retail Sales y/y (exp 0.8%, prev –0.5%) At 3:55 AM January Germany Unemployment Rate SA (exp 9.7%, prev 9.8%) January Germany Unemployment Change (exp –40k, prev –108k) At 5:00 AM January Eurozone Consumer Confidence (exp –6, prev –6) December Eurozone Unemployment Rate (exp 7.6%, prev 7.6%) At 5:30 AM UK January GfK Consumer Confidence Survey (exp –9, prev –8) At 8:30 AM US Q4 GDP y/y (exp 3.0%, prev 2.0%) US Q4 GDP Price Index (exp 1.7%, prev 1.9%) US Q4 Personal Consumption (exp 4.0%, prev 2.8%) US Q4 Employment Cost Index (exp 1.0%, prev 1.0%) Canada GDP m/m (exp 0.3%, prev 0.0%) At 10:00 AM US January Chicago PMI (exp 52.2, prev 51.6) US December Construction Spending (exp 0.0%, prev –0.2%) At 2:15 PM FOMC Monetary Policy Announcement (exp 5.25%, prev 5.25%)

Foreign exchange traders will be treated to a barrage of economic data and events from both sides of the pond on Wednesday -- kicking the session off with a battery of European economic data, then capped off by US and Canadian reports. The potentially market moving event risks for the day will provide a glimpse of US interest rate direction, economic growth, consumption and inflation. Currencies have remained confined to range trading at the onset of this week, with most awaiting the arrival of several key barometers on the state of the US economy. The biggest moves thus far have been limited to the yen pairs as heightened jawboning from both Eurozone and Japanese officials have suggested more careful discussion about currency valuations at the upcoming G7 Finance Ministers meeting, to be held on February 9-10.

The US economy is forecasted to bounce in Q4 at an annualized growth rate of 3.0%, compared with 2.0% in the previous quarter. The significance of the rebound to 3.0% will push economic growth in the US back past that of the Eurozone’s economy, in which the lead was relinquished in Q3 when the Eurozone’s economic growth outpaced the US’ at 2.7% versus 2.0%. An improving scenario in the US growth outlook reinforces sentiment for a soft landing in the economy and provides the Fed additional scope in maintaining its bias against risks to inflation. Also supporting the case for improving fundamentals is the forecasted rise in US Q4 personal consumption, seen up by 3.0% compared with 2.0% from the prior quarter. Meanwhile, inflationary pressures are expected to ease further with the GDP price index estimated to slip to 1.7% from 1.9% and the employment cost index (ECI) unchanged at 1.0%. The rosy estimates for Q4 suggests that the worst may be behind us, thereby providing interim support for the dollar.

The FOMC is widely expected to leave its benchmark-lending rate unchanged at 5.25% when it announces its decision later today at 2:15 PM New York time. We anticipate the Fed to echo a similar tone to its December statement, in which the “Committee judges that some inflation risks remain” and “the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth”. However, we expect the Fed will acknowledge recent improvements in the data, particularly from housing and manufacturing. Additionally, the FOMC will likely reiterate further moderation in energy prices as well as contained inflation expectations.

The foreign exchange market is trading in range ahead of a number important data and events coming up tomorrow.

The dollar was little changed after a report showed US consumer confidence index rose to 110.3 in January as expected. The market tomorrow will look into US fourth quarter employment cost index, personal consumption, GDP report, January Chicago PMI, and the FOMC decision announcement. The Fed is widely expected to keep interest rates unchanged at 5.25%. Besides, a bunch of other US key economic indicators, including PCE index, personal spending and income, manufacturing ISM, and last and not least the job report from Labor Department, are followed. We will get really busy with all those numbers coming out. The market will focus on the GDP report, the FOMC policy announcement and the job report to figure out which way the dollar should go.

GBPUSD encounters interim resistance at 1.9630, backed by 1.9650, and 1.9680. Subsequent ceilings will emerge at 1.97, followed by 1.9730 and 1.9750. On the downside, support begins at 1.96, followed by 1.9580 and 1.9550. Additional floors are eyed at 1.9520, backed by 1.95 and 1.9470.

EURUSD will face interim resistance at 1.2970, followed by 1.30 and 1.3030. Additional ceilings will emerge at 1.3050, backed by 1.3080. Support starts at 1.2930, backed by 1.29, 1.2870 and 1.2850. Subsequent floors are eyed at 1.28.

Yen Remains Soft Despite EU Comments

The yen remains weak against the dollar though European officials voiced their increased concern on yen weakness at the eurogroup finance minister meeting yesterday. Several worse than expected Japanese data due last night, including overall household spending, personal income, and unemployment rate, put more pressure on the yen.

Eurogroup president, Jean-Claude Juncker, said on Monday he was expressing worries on yen weakness with greater intensity than at the last G7 meeting in Singapore in September. Other European monetary policy makers also said they would bring up this issue again at the G7 meeting. These comments initially gave the yen a slight boost, especially versus the euro. Unless G7 discuss the Japanese exchange rate as a main topic as European countries wish to at Feb 9-10 meeting, the yen may not rebound much from lows just because of these repetitive comments from Europe.

USDJPY encounters interim resistance at 121.80, backed by 122 and 122.20. Subsequent ceilings will emerge at 122.50, followed by 122.70. On the downside, support begins at 121.50 and 121.20, followed by 121. Additional floors are eyed at 120.70, backed by and 120.50.

At 2:00 AM UK January Nationwide House Prices SA (exp 0.8%, prev 1.2%) At 4:30 AM UK December M4 Money Supply SA m/m (exp n/f, prev 0.9%) UK December M4 Money Supply y/y (exp n/f, prev 12.8%) At 10:00 AM US January Consumer Confidence (exp 110.0, prev 109.0)

Currency traders continue to wait for the barrage of US economic events this week, but for the time being remain sellers of yen amid growing uncertainty over the BoJ’s tightening prospects. Meanwhile, many are increasingly anticipating the FOMC to remain on hold for the remainder of the year in light of the improving trend in US economic reports – further solidifying the soft-landing scenario.

The most marked improvement for the data this week will be fourth quarter GDP, forecasted to jump to 3.0% on an annualized basis, versus 2.0% from the previous quarter. The data will also provide a glimpse of the risks to inflationary pressure and growth, with core PCE also released this week. Additionally, with the firm labor market, it will be interesting to see if the FOMC acknowledges pressure from wages when it gives its statement on Wednesday. We anticipate the Fed to maintain its hawkish bias and comment on the improvements in economic fundamentals, particularly in housing and manufacturing.

In the coming session, markets will turn to the Conference Board’s consumer confidence report. The January consumer confidence reading is expected to improve to 110.0 from 109 a month earlier.

BoJ Rate Hike Prospect Eases with Data

Economic data from Japan continues to be mixed, suggesting further delays in any potential monetary policy tightening from the BoJ until at least the second half of 2007. Last week’s consumer price inflation data set the tone for no change from the Bank of Japan in Q1, coming in softer than expected. Earlier in the Tokyo session, a mixed batch of economic reports reinforced the inconsistency in the recovery and the dilemma facing the BoJ’s return to a gradual tightening of interest rates.

Although Japan’s December industrial output beat out consensus forecasts for a rise of 0.3%, climbing to 0.7% -- the upcoming outlook for January manufacturers’ output is seen at –2.8%. Nevertheless, the METI maintained its upbeat assessment that industrial production remains on an improving trend. Adding to the bleak tone of Japanese data, the December all-households spending plunged by 1.9%, marking its 12th consecutive monthly decline and exceeding estimates for a 1.2% decline – echoing the drop in retail sales earlier in the week. Also released were figures on the labor market, with the unemployment rate unexpectedly edging up higher to 4.1%, worse than calls of 4.0%. Meanwhile, the December jobs-to-applicants ratio improved to 1.08.

Economics Minister Hiroko Ota downplayed the drop in household spending, saying the fall was largely attributed to a warm winter. He does not interpret the consumption data to suggest either a large deterioration or improvement. Japan’s Finance Minister Koji Omi responded to questions about calls from Eurozone officials that the euro is overvalued against the yen. Omi said that currencies should accurately reflect fundamentals. Further, he added that the jobs market data suggests that Japan’s economy continues to growth steadily. Meanwhile, Prime Minister Abe reinforced the independence of the Bank of Japan, saying monetary policy was exclusively under the BoJ’s jurisdiction.