Forex News Recap 12.22.2010: Pound and Euro Sink, Even as US GDP and Home Sales Miss Expectations

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China Boosts EUR by Saying It'll buy Portuguese Bonds

The USD was weaker overnight in European trading hours amid reports that China is willing to buy EUR4 billion to EUR 5 billion of Portuguese debt. That helped boost risk appetite for the EUR and other riskier currencies, and weakened the more safe-haven USD.

The Chinese endorsement offset the latest negative euro-zone sovereign rating action from Fitch, which late Tuesday placed Greece's ratings on review for a potential downgrade.

Portugal's overall net supply is projected at around EUR17 billion in 2011, if China buys EUR4-5 billion in bonds it may only serve to alleviate some of the funding pressures.

EUR/USD - Euro Gives Up Overnight Gains

Heading into NY session, however the pattern we had talked about re-emerges, as USD weakness in EUR trading and heading into NY has been more often than not this past 2 weeks been followed by USD strength during the NY session. Today was no exception. We had some indigestion following the US GDP report which we will get to in a sec, but with housing sales and house prices data showing improvement, the USD erased its earlier losses vs. EUR and was testing this week's low at 1.3080.

What's Up with GBP?

As we progress through this week, we continue to see a beleaguered GBP. The GDP data today showed consumer=spending growth slowed to 0.3% in the 3rd quarter compared to 0.8% gain in 2nd quarter. Recent data shows that the UK economy is maintaining momentum in the fourth quarter, weakening the case for additional stimulus by the BOE. Jobless claims fell for a second month -- though the unemployment unexpectedly increased -- and manufacturing strengthened. We also had inflation accelerate to its fastest pace since May last month. One of the main take-aways from the BOE Minutes that were released today was that the MPC "considered that the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards". We had another three-way split.

That suggests that its next move is more likely to be a rise in interest rates than a boost to stimulus. Consumer confidence remains weak, and austerity measures are going to bite as government cuts back spending and taxes rise. If that is combined with higher inflation, it's not the best mix, which may explain the volatility in the GBP right now, and why we're moving lower despite the MPC focusing on higher inflation.

US GDP - Smaller Revision Misses Forecast

The third version of the US GDP release for the 3rd quarter undershot expectations but still shows a US economy that is picking up growth on the back of stronger consumer spending. There had been a build up to this report, with the consensus forecast coming in at around 2.8%. Instead we got a smaller increase to 2.6% from the preliminary estimate of 2.5%. Inventories rose more than initially reported, while the rise in household purchases was revised down. Growing incomes, the continuation of Bush-era tax cuts and an improving labor market may encourage Americans to boost their spending, which bodes well for the 1st quarter of next year.

Read the full transcript here: http://bit.ly/hKf1EX

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Chief Market Analyst: Nick Nasad

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• us gdp
• us economy
• existing home sales
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• usd/cad
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