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Forex Research - US Dollar: 96% Chance of a September Rate Hike?
â€˘ Euro Hit by US Data
â€˘ British Pound Nears 3 Months Low
US Dollar: 96% Chance of a September Rate Hike?
The US dollar has strengthened across the board following a much better
than expected retail sales report. Consumer spending increased 1.0
percent in May, the strongest pace of growth in 6 months thanks to tax
rebates and higher gasoline prices. Aside from the miscellaneous
category, retail sales increased across the board. As the Bush
Administration has hoped, Americans are spending rather than saving
their tax rebates. This number indicates that the economy most likely
skirted negative GDP growth in the second quarter which fueled
speculation that the Federal Reserve could raise interest rates before
the end of the year. According to the latest Fed fund futures, the
market has already priced in a 96 percent chance of at least a quarter
point rate hike in September. There is a 67 percent chance that the
rate hike could happen in August. These are difficult times for the
Federal Reserve who knows that even though recent economic data
reinforces their plans to keep interest rates steady, economic growth
could easily falter in the coming months. However at the same time,
inflation and inflation expectations continue to rise. Although crude
oil prices have retraced, they are still hovering near record highs
while floods in the Midwest have driven corn prices to all time highs.
There is little respite for food and gasoline prices which is why the
market believes that despite the risks to growth, the Federal Reserve
will have to raise interest rates and not just once. Consumer prices
are due for release tomorrow and this will confirm or deny the need for
a rate hike. When growth is weak, making inflation a top focus could
lead to even weaker economic conditions in the future. Jobless claims
jumped to the highest level since March while continuing claims reached
their highest in 4 years. More people are losing jobs, raising the risk
of a further slowdown in the US economy, but for the time being, the
prospect of slower growth is a secondary priority for the Federal
Euro Hit by US Data
Stronger Eurozone economic data and hawkish comments from the European
Central Bank have failed to prevent the Euro from succumbing to the
better than expected US retail sales report. The ECBâ€™s commitment
towards fighting inflation is well known, which is why FX traders were
not surprised by the release of the ECB monthly bulletin, which
confirmed that the central bank is in a state of â€śheightened
alertness.â€ť The warning that they stand ready to act to counter
inflation has already been priced into the markets. The possibility of
a rate hike by the Federal Reserve on the other hand, is completely
new. Eurozone industrial production and French non-farm payrolls were
both stronger than expected, reinforcing the ECBâ€™s hawkish bias. Unlike
the US, the downturn in the Eurozone economy has been limited, which
puts them in much better shape to raise interest rates. Although ECB
member Stark suggested that a rate hike would be one-off, if the
Federal Reserve can raise interest rates more than once, so can the
European Central Bank.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Nears 3 Months Low Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
The British pound is closing in on its 3 month low despite the fact
that inflation expectations hit the highest level in 15 years. Central
Bank governor, Mervyn King attributed the rise in inflation to rising
commodity prices. BoE officials are keeping a close watch on the wage
rate, for indications of future inflationary pressure. Speculations
rise that the BoE would soon be hiking their key interest rate in order
to sustain the economy from inflation, however it remain to be seen if
Mervyn King would be quick to react, as the economy experiences slowing
growth. Due to lack of economic data, investors look forward to next
week when consumer prices and retail sales are due for release. In
addition, markets will be paying a lot of attention to BoE minutes, in
order to attain a clear understanding of central banks sentiment. For
the time being, the pound is weak against the dollar and the US CPI
report will dictate how the GBP/USD trades over the next 24 hours.
Australian Dollar Plummets, Canadian and New Zealand Dollars Follow Suit
The Australian dollar plummeted following the surprise drop in
employment last month. The market was expecting a rise of 13,500 jobs,
but instead, 19,700 jobs were lost between April and May. The
unemployment rate increased from 4.2 to 4.3 percent, putting an end to
19 months of consecutive job growth. Prior to the employment report,
there was widespread belief that the Reserve Bank of Australia would
raise interest rates in the coming months and even though this report
certainly throws a wrench into those forecasts, the acting Treasurer
reminded the market that there is no room for complacency in their
â€śwarâ€ť against inflation. New Zealand retail sales are due for release
this evening. Although they are expected to be rebound due to an
improvement in credit card spending, business PMI dipped into
contractionary territory last month, so traders should not completely
rule out a miss. The Canadian dollar on the other hand has only
weakened slightly against the greenback.
Tell us what you think on the Canadian dollar Forum.
USDJPY Closing in on 4 Month High
The US dollar is closing in on its 4 month high against the Japanese
Yen as stronger US economic data drives the currency pair higher.
Industrial production and consumer confidence are due for release this
evening along with the Bank of Japan interest rate decision. Despite
rising inflationary pressures, the Bank of Japan is not expected to
raise interest rates until the end of the year, at the earliest. Japan
also officially raised meat prices, which is a confirmation that
inflation is hitting the country hard.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
Â©2008 DailyFX. All Rights Reserved.
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