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Currencies took a hit this morning following weaker U.S. economic data. Risk appetite was dampened by fresh data that highlighted the ongoing challenges in the U.S. economy.  There have been recent improvements in the labor market and other parts of the economy, but unfortunately, a lower unemployment rate has not translated into stronger consumer spending.  We can now understand why Federal Reserve officials have eyed the recent improvements in the U.S. economy with skepticism. According to the latest retail sales figures, consumer spending rose a mere 0.1 percent in December, which is a worrying sign that heavy discounting and the holidays failed to drive enough consumers into the stores.  Excluding gas and autos, sales were even worse - experiencing zero growth in December. The biggest drop off in spending was on electronics and general merchandise but gas stations receipts also revised higher just like the prior month's report because spending picked up the last two weeks of the year. Adding salt to the wound were jobless claims which ticked up to 399k from 375k, which is just within an inch of the psychologically significant 400k level.  If claims rise back above 400k, investors will start to worry about payroll growth falling sharply in January.  USD/JPY remains rock solid - taking the U.S. data in stride but the initial reaction in the other majors reflects everyone's concerns that the end of the year recovery in the U.S. economy was but a mere illusion.

Meanwhile trading in the EUR/USD has been choppy this morning. As expected the European Central Bank kept interest rates unchanged at 1.00 percent.  Cautiously optimistic comments from ECB President Draghi suggests that for the time being, the central bank is happy with last month's rate cut and liquidity measures and has no plans to ease again in the immediate future.  According to Draghi, there are "tentative signs of stabilization" in economy. This morning's European bond auctions show that their LTRO program has been successful but it would be remiss for him to not consider the "substantial downside risks" that still remain especially since the austerity measures by European governments are expected to pose a big risk to growth this year. Although the EUR/USD rallied because Draghi made no mention of more easing, its gains should still be limited because assuming that the central bank has shut the door on more stimulus because two small bond auctions went well,  is premature.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.