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Forex Research - Currency Traders Tread Carefully on Fears that the Fed Will Be Non-Committal
â€¢ ECB: One Hit Wonder?
â€¢ British Pound Sells Off on Dovish Comments
Currency Traders Tread Carefully on Fears that the Fed Will Be Non-Committal
The Federal Reserve begins their two day monetary policy meeting
tomorrow and judging from the price action of the US dollar and reports
from the press, dollar bulls are treading carefully on the fear that
the Federal Reserve will be non-committal. The continual rise in food
and energy prices is adding to the burden on US consumers. The
unemployment rate jumped from 5 to 5.5 percent last month, the largest
rise in over 10 years. Unfortunately the labor market is expected to
worsen as companies like Citigroup and Goldman Sachs announce more
layoffs. With this in mind, many people are wondering whether Fed fund
futures are overpricing rate hikes. According to the pricing of the
latest contracts, most traders expect 2 rate hikes before the end of
the year. If this proves to be overly ambitious, the dollar could come
crashing down as the prospect of interest rate hikes is the primary
factor driving the dollar higher. Over the past few weeks, the EUR/USD
has been trading in a range as traders try to figure out how who is
more hawkish, the Federal Reserve or the European Central Bank. After
surprising the markets with hawkish comments on April 30th, currency
traders not only expect the Federal Reserve to pause on Wednesday for
the first time since August, but to also raise interest rates before
the end of the year. If a rate hike is coming, the Federal Reserve
would need to toughen up their stance on inflation. The tone of the
FOMC statement and more specifically the degree of the Fedâ€™s
hawkishness will play a big role in determining where the US dollar is
headed next. Dollar bulls will not be happy with anything short of
unambiguously hawkish comments from the Federal Reserve. Anything close
to a wishy-washy statement will be dollar bearish. With the Federal
Reserve meeting right around the corner, the summer doldrums should not
be with us for long. However in the meantime, we are expecting consumer
confidence, the Richmond Fed Manufacturing index and the house price
index. Given the drop in the University of Michigan consumer confidence
numbers and the Philly Fed index, tomorrowâ€™s data could force the
dollar to give back some of its gains.
ECB: One Hit Wonder?
It is becoming increasingly apparent that the European Central Bank may
only be a hit a wonder this summer. Although ECB President Trichet
warned that interest rates could be increased next month, slowing
growth may prevent them from raising rates further than 4.25 percent.
Unlike the Federal Reserve, Eurozone interest rates are high because
the ECB has not cut interest rates throughout the Fedâ€™s easing cycle.
As a result, there isnâ€™t a significant amount of room to raise rates.
On top of that, economic data from the Eurozone is taking a turn for
the worse. Service and manufacturing PMI both dipped into
contractionary territory, taking the composite PMI index for the
Eurozone below 50, the lowest on record (Series started in 2005). This
explains why there has also been a sharp drop in German business
confidence. With the prospect of an interest rate hike, the country is
no longer immune to the damaging economic impact of higher oil prices.
Over the next 24 hours, we are looking forward to the German GfK
consumer confidence numbers and French consumer spending â€“ both pieces
of data have greater downside than upside risks. Switzerland will also
be releasing the UBS consumption index. Given the dovishness of the
Swiss National Bank last week, consumption should be weak.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Sells Off on Dovish Comments
After last weekâ€™s stellar performance, the British pound lost ground
against the US dollar today, partially due to weak housing data, as the
monthly Right move house prices ended in the red. Tighter lending
conditions resulted in excess supply of homes in the UK, driving down
prices. In addition, new research released by Centre for Economic and
Business Research indicated that slowdown in the economy could result
in an excess of 300,000 employees being laid off in the near future.
Upcoming Nationwide House Price and GDP figures should provide more
insight on the health of the economy. Any deviations from expectations
should see the GBP sink further against the USD. As more bad news comes
rolling in, investors are becoming uncertain about a rate hike to fight
inflation. BoE member Sentence said this morning that the central bank
is in no rush to raise interest rates.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Oil Refuses to Retrace, Boosting the Canadian Dollar
The Oil Summit in Jeddah this weekend has resulted in a whole lot of
nothing. Saudi Arabia has simply confirmed that they will be increasing
production by 200k barrels next month, but the Saudi rise was
completely wiped out by further attacks on production facilities in
Nigeria. Unfortunately nothing significant came out of the Oil Summit
which means that crude prices may not see any respite until the OPEC
meeting in September. This has helped drive the Canadian dollar higher
on an otherwise quiet trading day. The Australian and New Zealand
dollars have given back some of their recent gains as new motor vehicle
sales drop in Australia while visitor arrivals in New Zealand
Tell us what you think on the Canadian dollar Forum.
Dow Clings to Gains, Quiet Trading in Yen Crosses
The US dollar managed to gain strength against the Japanese Yen, as the
pair tested the 108 level, in the intraday trading session. Weak
economic releases, spelled losses for the yen, as Supermarket sales
figures showed a decline due to apathetic spending on household and
clothing items. In addition, BSI Large Manufacturing and BSI Large All
Industry figures posted in the red, confirming suspicions that
businesses continue to suffer from the recent rise in oil prices. The
upcoming US FOMC meeting will determine where USD/JPY is headed.
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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