The US dollar index has continued to rise overnight, making new 3 month highs, after data showed that sales of existing U.S. homes rose more than forecast in November.

This has bred increasing confidence that the recovery is starting to gain traction in the US economy. The recent better data is supporting the belief that the US central bank may start to move rates higher, sooner rather than later, and any increase, above expectations, in new US home sales this afternoon, will continue to support that belief.

The dollar continued to gain against the Euro and the pound, on comments by ratings agency Fitch’s, global strategist Brian Coulton, who stated that unless the UK and France took serious steps to deal with their burgeoning fiscal deficits, they could no longer rely on their top AAA rating for much longer.

The pound will again be in the spotlight today, after yesterday’s slightly disappointing GDP revision, when the Bank of England publishes its minutes from its December meeting.

EURUSD – the Euro continued its declines yesterday, taking out last weeks lows at 1.4260/70, and hitting 1.4215 in European trading yesterday, stopping just short of the 200 day moving average at 1.4197. Long term targets remain at 1.4120, and then 1.3800 in the first quarter of 2010.

GBPUSD – the break and close below the long term 200 day moving average yesterday has shifted sentiment even more bearish for the pound, especially in light of the comments by Fitch and the slightly worse then expected GDP revision. UK 10 year gilt futures yields closed at their highest levels since June, as investors shunned UK gilts. The pound needs to get back above 1.6020 to minimise the risk of a move the October lows at 1.5710.

EURGBP – the weakness of sterling has boosted the Euro here as it rebounded above the 0.8920/30 resistance. It has managed to hold onto these gains so far, holding above 0.8920 over the last 12 hours. While it does so the risk is for further sterling declines towards 0.8970/80.

USDJPY – the dollar has continued its rise against the yen, and is on course to post its biggest monthly rise since February this year, as it looks to head towards the October highs at 92.70.
Bank of Japan governor Shirakawa’s determination to fight deflation with “virtually zero” rates is undermining the yen and giving respite to Japanese exporters.
The dollar should remain fairly well supported on dips around 90.80 and trend line support at 90.30.