Daily Forex Overview

Previous session overview

The US dollar rallied to fresh two-week highs against its major rivals Thursday when the President of the European Central Bank dually confirmed ECB inaction and a shift in the global economic outlook chewed about by market watchers: that the euro zone economy is at risk too.

The U.S. currency consequently endeared investors for its lower interest rates and already cautious central bank. The euro fell to a 12-session low of $1.4440, its lowest value since Jan. 22, from an intraday high of $1.4653. The British pound also fell to a 12-session low of $1.9390, significantly off its intraday high of $1.9622.

Another round of disappointing U.S. data added to the uncertainty in U.S. equities. The yen inversely followed volatile U.S. stocks in typical fashion, and when the Dow Jones Industrial Average leapt into the green, the euro hit an intraday high and the dollar hit a nine-session high against the yen.

The yen typically gains when stocks and risk sentiment turn sour because investors take money out of higher-yielding currencies to channel into the safer, lower-yielding currencies.

ECB President Jean-Claude Trichet hinted at a shift in the bank's monetary policy stance amid signs of a cooling euro-zone economy in a news conference after the the ECB governing council left rates unchanged at 4.0%.

He said the most recent economic data have confirmed assessments that the euro zone economy is slowing down. However, the ECB voted not to act. Trichet emphasized that inflation concerns counterbalance the ECB's response given that anchoring those expectations are the bank's single mandate.

Trichet's remarks appeared to take earlier talk of an ECB rate hike firmly off the agenda, and even moved up the possibility that the ECB could soon join the U.S. Federal Reserve and the Bank of England in lowering rates.

Currency analysts have been comparing the ECB's inaction to the Fed's proactive rate-cutting activity to contain a U.S. recession - the former depicted as delaying and the latter as responsible.

Meanwhile, the Bank of England cut its key interest rate Thursday by 25 basis points to 5.25%. The pound rose against the dollar immediately after the decision was announced, but reversed course after Trichet's speech. The pound was already battered earlier on weak U.K. manufacturing output data, which fell 0.2% on the month in December, compared with a 0.1% fall in November. Output in the manufacturing sector makes up about 15% of the U.K. gross domestic product. A Dow Jones Newswires survey of economists had forecast manufacturing output would rise 0.1% on the month.

The National Association of Realtors reported that its index of pending home sales in the U.S. fell 1.5% in December compared to November. That is 24.2% down from a year ago. Also, retailers Thursday reported January sales figures below already-low forecasts.

However, the number of U.S. workers filing new claims for unemployment benefits fell last week, tempering labor market fears due to the stunning surge reported a week earlier. Initial claims for jobless benefits fell by 22,000 to 356,000, after seasonal adjustments, in the week that ended Feb. 2, according to the Labor Department. The previous week was revised up to 378,000 from 375,000.

Market expectation

Today will be a quiet data day in the U.S. Later today there are some Fed and ECB speakers and over the weekend the G7 meets in Japan. Regarding that G7 meeting, there recently were some attempts from France to bring the euro strength on the agenda, but this theme most likely won't reach the official annoncement. Europe the German industrial orders might get some attention, but is no market mover.

Most important events of the day