U.S. dollar and Treasuries. The emergence in the direct correlation between the dollar and gold can be explained better by the rise in bond yields (fall in prices). The past week has witnessed a rise in bond yields that was accompanied by a not-so-smooth strengthening in the value of the dollar. Despite the dollar's leap to 23-year highs vs. GBP, the currency made more modest gains vs. the euro, while nearing 14-year lows against the yen. The U.S. currency's gains were sketchy at best, as the rise in bond yields emerged from supply concerns (excessive borrowing) rather than improved economic data. Yields on 10-year treasuries hit six-week highs as the Obama Administration is expected to step up the nation's borrowing to a new record high, taking the fiscal deficit to as high as $1.4 trillion or (9.5%-9.8% of GDP). This week, auctions of two-year notes, 10-year notes and 20-year TIPS will raise $78 billion. As the dollar is unable to respond fully to rising bond yield's resulting from supply worries, gold prices take over the mantle of safety.
Wednesday's FOMC decision will no longer carry the usual suspense associated with the size of the rate cut after the FOMC clarified it will keep rates near zero for "some time." Instead, the quantity of bonds purchased will be the new focus as the Fed implements the Term Asset-Backed Securities Loan facility, which case Treasuries may stabilize, yields weaken and the dollar ease lower.
Today's 15:00 GMT release of U.S. Dec existing home sales is expected to show 2.0% decline to 4.4 million. Also at 15:00 is the Dec leading indicators index expected to show a 0.2% decrease after two straight declines.
Euro has a firm grip above the $1.29 figure after last week's successful stabilization at the $1.2760 low kept bears at bay despite the latest S&P downgrade of a Euro zone member. Tuesday's IFO survey will be mulled for its components as both the current conditions and expectations index will have to show declines in order for EUR/USD to fall markedly. EUR/USD is unlikely to repeat last week's wobbly tone especially ahead of the zero-bound FOMC. Trendline resistance remains firm at $1.3030, followed by the 50-day moving average of $1.3320. EUR/GBP's six-day rally is being reversed amid a partial pick-up in risk appetite. 0.9275 is seen as a temporary support that could be broken only in the event of accumulated buying in global equities. GBP/USD made its obligatory bounce from the latest 23-year low of $1.35, but gains are increasingly capped at $1.3980. The main drivers of any sterling rebound are seen as technical buying, overall USD selling on Fed credit easing and the resulting bounce in risk appetite. Subsequent gains could emerge towards $1.4070.
USD/JPY rallies along with the rest of yen pairs as European bourse and U.S. equity futures broaden in the green territory. The break above 89 is seen extending towards 89.50, but trend line resistance (from Jan 19 high) seen imposing at 90.10. Support climbs to 88.40, backed by 87.80.
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