Wednesday June 25, 2008 - 23:30:02 GMT
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Forex Research - Is the Dollar Rally over?
â€˘ Euro Breaks Higher as Market Shifts Focus to ECB
â€˘ EUR/JPY Hits Record High
Is the Dollar Rally Over?
The Federal Reserve left interest rates unchanged at 2 percent and
upgraded their degree of hawkishness but unfortunately for dollar
bulls, the Fed was not hawkish enough (Detailed Take on the FOMC).
What currency traders came to realize was that even though the Fed
could still raise interest rates in September, the ECB will beat them
to them punch. Federal Reserve members are in no rush to show their
cards because time is on their side. With 2 non-farm payrolls and
multiple inflation reports before the next Fed meeting, the US central
bank will get a much better sense of whether US consumers and
businesses can handle a rate hike. In the meantime the dollar may
continue to let off some steam, particularly against the Euro. Non-farm
payrolls and the European Central Bank meeting are both scheduled for
the same day next week, which could give us two reasons to sell the US
dollar. However any further weakness should just be a bump in the road
for the US dollar because the ECB has already forewarned the markets
that the July rate hike may be one-off. Therefore the focus will shift
back to the Federal Reserve, whose next move will be a rate hike. If
inflation refuses to ease over the next few months, the Fed may be
forced to tighten monetary policy more than once. In that case, they
could be perceived as more hawkish than the ECB, which would help the
dollar recover. This is of course assumes that economic conditions do
not get progressively worse over the next 2 months and inflation does
not suddenly drop. Durable goods orders and new home sales elicited
nothing more than a yawn as both numbers came out very close to
expectations. The final figures for first quarter GDP, jobless claims
and existing home sales are due for release tomorrow. All three pieces
of data are expected to be dollar bullish with GDP predicted to be
revised higher and existing home sales expected to rebound.
Euro Breaks Higher as Market Shifts Focus to ECB
The currency pair that had the most significant reaction to the FOMC
announcement was the EUR/USD. With the Fed meeting behind us, the ECB
is the only central bank expected to make any changes in interest rates
over the next 2 months. ECB President Trichet said this morning that
there is an acute risk of wage price spiral and reminded the market
that they could raise interest rate 25bp at the next meeting. The ECBâ€™s
intentions should be quite clear and with a little more than one week
to the ECB meeting, the market may continue to bid up Euros against US
dollars simply because one central bank will be raising interest rates
while another remains stationary. This would widen the gap between
Eurozone and US interest rates from 200 to 225bp in the Euroâ€™s favor.
In the meantime, good news is still being reported from the Eurozone.
Industrial new orders jumped 2.5 percent in the month of April, well
above the marketâ€™s -0.5 percent forecast. German import prices are due
for release tomorrow and given the rise in oil prices last month, we
expect import prices to continue to edge higher. The ECB also has no
problems with further Euro strength. According to ECB member Wellink,
the equilibrium rate for the Euro is around 1.60. The central bank
wants the Euro to rise because they know it will help to ease
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
EUR/JPY Hits Record High
The Dow Jones Industrial Average was up more than 100 points following
the FOMC rate decision. Even though it erased all of those gains, the
Japanese Yen crosses ended the US trading session near its highs.
EUR/JPY was the best performer. The currency pair hit a record high
thanks almost entirely to Euro strength. With central banks around the
world turning hawkish, carry trades are back in the limelight. The
Japanese merchandise trade balance was released last night. It was
stronger than expected as accelerating shipments to Asia helped to
offset softer demand from the US and Europe. The corporate service
price index also accelerated, reflecting growing inflationary
pressures. There is no significant Japanese data due for release this
evening, but things will pick up tomorrow when retail sales and
consumer prices are scheduled for release.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
US Dollar Weakness Sends Australian, New Zealand and Canadian Dollars Edge Higher
Despite a drop in commodity prices, US dollar weakness has sent the
Australian, New Zealand and Canadian dollars higher. The only piece of
economic data released from the three commodity producing countries was
New Zealand, who reported the lowest level of consumer confidence in
the history of the series, which was created back in 1993. Over the
next 24 hours, we are expecting the New Zealand current account
balance, and the Australian Conference Board index of leading
indicators. Both numbers have a chance of surprising to the upside
which should help to fuel further gains in the Aussie and Kiwi.
Tell us what you think on the Canadian dollar Forum.
UK Retail Sales May Reverse
The British pound was at the whim of the US dollar and Euro today with
the CBI Distributive trades survey failing to motivate any meaningful
action in the currency. Last month, retail sales were very strong, but
next month, consumer spending could falter. Even though the CBI retail
sales index was less negative than the last two months, sales expected
for the month of July plummeted. In other words, retailers do not
believe that the strong pace of growth reported last month can be
repeated next month. Like the US dollar, the pound has fallen victim to
the prospect of higher interest rates in the Eurozone and stagnant
rates in the UK. Although inflation is more than a full percentage
point above the Bank of Englandâ€™s 2 percent target, the lack of
definitive strategy on interest rates is hurting the British pound.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
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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