Saturday July 26, 2008 - 02:25:59 GMT
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Forex Research - Dollar Rallies on Strong Data, but Watch Out for a Big Week
â€¢ The ECB Has Room to Raise Interest Rates?!
â€¢ Is the UK Headed for a Recession?
Dollar Rallies on Strong Data, but Watch Out for a Big Week
Stronger economic data has driven the US dollar higher against many of
the major currencies. New home sales, consumer confidence and durable
goods were all better than the market expected, a sign that the mood of
US consumers and businesses may be changing. The number of new homes
sold in the month of June was more than the market expected, but the
big surprise was the 50,000 unit revision to the past 3 months of data
and the reduction in inventory. The numbers indicate that there is
still decent activity in the housing market and even though house
prices are down on an annualized basis, the median price of a home sold
has increased from the prior month. The final University of Michigan
consumer confidence numbers also rebounded to a 3 month high after
falling to a 28 year low in June while durable goods increased 0.8
percent compared to the marketâ€™s -0.3 percent forecast. Todayâ€™s
economic releases were almost too good to be true and for that reason,
we are cautiously bullish. With that said, it is quite impressive that
the US dollar has shaken off risk aversion. The divergence between the
price action of the US dollar, the stock market, gold and oil prices
indicate that risk aversion yesterday was limited despite the 280 point
drop in the Dow. If you recall, the dollar dropped only against the
Japanese Yen, and rallied against all of the other G10 currencies.
Looking ahead, consumer confidence and house prices are due for release
on Tuesday. Given this weekâ€™s upside surprises, both reports could be
dollar bullish. However second quarter GDP, non-farm payrolls and
manufacturing ISM which are due at the end of the week could turn
things around for the dollar. There have been no end to the layoff
announcements and not only do we believe that non-farm payrolls will
drop for the seventh straight month, but the job losses could be far
worse than the marketâ€™s -75k forecast.
The ECB Has Room to Raise Interest Rates?!
The Euro strengthened against the US dollar but the rally has been
marginal. Unsurprisingly, inflation last month was hot with import
prices rising 1.5 percent in Germany. Despite the recent deterioration
in Eurozone economic data, European Central Bank officials have been
revving up their degree of hawkishness which leads many people to
wonder whether the ECB is digging themselves into a hole. ECB member
Liebscher said this morning that the central bank has room to raise
interest rates and that it is absolutely necessary to prevent any
possibilities of so-called second-round effects. Unlike the Federal
Reserve who needs to worry about growth as much as inflation, targeting
inflation is the ECBâ€™s primary focus. In order to get their attention,
we may need to start seeing negative quarterly GDP growth. The central
bank only worries about growth when it has fallen below potential.
Recent economic data clearly indicates that the region is slowing and
if oil prices remain at $125 a barrel, the ECBâ€™s concerns about
inflation will start to ease, allowing them to become more sensitive to
growth. In the week ahead, retail PMI and German unemployment are the
big Eurozone releases. We expect this data to continue to be Euro
bearish. Meanwhile Switzerland will be releasing the UBS Consumption
Index and the KoF report of leading indicators.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
Is the UK Headed for a Recession?
GDP growth slowed in the second quarter, but the British pound managed
to rally. The pace of growth has fallen from an annualized rate of 2.3
to 1.6 percent, the lowest level since the first quarter of 2002 and
equaling the 15 year low. Weak consumer spending has been the primary
drag on the UK economy and given the recent trend of growth, the
country could be headed for a recession which is defined by 2 quarters
of negative GDP growth. The pace of deterioration in the UK economy has
picked up towards the end of the second quarter which implies that
unless there is a serious turnaround in the UK economy, the country
could be headed for a contraction in the third quarter. We are bearish
British pounds and expect the currency to underperform many of the
major currencies. Aside from manufacturing PMI and some housing market
data, the UK economic calendar is relatively light next week.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Oil Prices Continue to Fall, Taking the Canadian Dollar Lower
There was no economic data released from the 3 commodity producing
countries today, leaving the price action of the currencies dependent
upon oil prices. Crude continues to trend lower and ended the day at
$123.39 a barrel. This has weighed heavily on the Canadian, Australian
and New Zealand dollars. Although oil and gold prices will continue to
play a big role in the price action of the commodity currencies, there
are a few pieces of key data worth watching next week. New Zealand and
Australia both have trade data due for release, Australia also has
retail sales while Canada will be releasing their GDP report for the
month of May.
Tell us what you think on the Canadian dollar Forum.
Yen Crosses Rebound as Risk Appetite Stabilizes
The Japanese Yen crosses rebounded today as the stock market and risk
appetite stabilizes. Like the rest of the world, Japan has also been
hit by inflationary pressures. The latest inflation data shows that
core inflation has hit a 10 year high due to rising food and gasoline
prices. This has been a huge drag on the Japanese economy and part of
the reason why the trade surplus fell for the first time in 5 years
last month. The deterioration in trade was significant with the surplus
falling a whopping 89 percent in June. Japan is having a particularly
tough time with slowing export demand and surging import prices, which
is why the BoJ has turned bearish on the economy. There are a lot of
Japanese economic data due next week including the jobless rate, retail
sales and industrial production.
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@example.com
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