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Tuesday June 14, 2005 - 20:59:21 GMT
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Forex: EURUSD Traders Adamant About Testing 1.20

DailyFX Fundamentals 06-14-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· EURUSD Traders Adamant About Testing 1.20
· US Dollar Shrugs Off Weak Economic Data
· A Touch Of Hawkish-ness From BoE Governor

US Dollar

The fact that the US dollar continues to strengthen after consistently disappointing economic data is completely baffling. Today, we had very weak producer prices and negative retail sales, yet the dollar reverses all of its knee-jerk losses to trade 70 pips lower than the European session low. It is clear at this point that regardless of fundamentals, traders really want to take a stab at all of those stop losses clustered right at or slightly below 1.20. There are some who even argue that the details of the reports are not as discouraging as the headline numbers but with producer prices falling a whopping 0.6%, and core prices rising only 0.1%, it is hard to scramble up justification for the dollar’s relentless rally. Retail sales fell 0.5% in May with sales excluding autos sliding by 0.2%. Admittedly, sales in April were revised higher, offsetting some of May’s disappointing performance. However, for those who are saying that there is nothing to worry about at this point, we’ll see if they say the same thing tomorrow when we receive the more important consumer price index and report on Treasury International Capital flow. Core consumer prices remained stagnant during the month of April and are expected to rebound in May. However, if it doesn’t we will have a good case for less than measured tightening in the months ahead. With the EURUSD hovering less than 30 pips from the 1.20 level, tomorrow could be judgement day for the EURUSD. There are six pieces of key US economic data slated for release along with the Fed’s Beige book report. Not only will investors be watching to see if inflation will continue trending downwards, but also if foreign funding was able to rebound in the month of April. The current forecast is for purchases of foreign securities to increase by $70B, up from the incredibly disappointing number of $45.7B that we saw for the month of March. However the forecast remains questionable since Bloomberg only received responses from 5 analysts, none of which are from the major investment banks.

Euro

Bearishness in the euro is now at extreme levels with the single currency plummeting another 100 pips against the dollar. Comments from Germany’s Koch Weser about the pessimistic outlook for Eurozone growth gave dollar bulls another good reason to send the beleaguered euro even lower. Politics continue to dominate the headlines with UK Prime Minister Tony Blair warning that if the EU decides to freeze the UK’s rebates, it would force them to exacerbate the demise of the European Union. In 1984, British Prime Minister Margaret Thatcher had won England the right to a 5B dollar annual rebate from the EU as Britain has been the zone’s largest creditor; however, EU officials headed by French President Jacques Chirac are now petitioning English PM Tony Blair to renegotiate the deal. Blair on the other hand is saying that freezing the rebate would threaten future funding for the European Union. The market is holding its breath with everything building up to the June 16th EU Summit.

British Pound

The British pound sold off for the fifth consecutive trading day on more hawkish comments from Bank of England Governor King along with higher consumer price inflation. The market had been expecting consumer prices to fall to 1.8%, but instead it held steady at 1.9%. Since the central bank’s core focus is inflation, today’s release supports King’s slightly hawkish stance. He still remains concerned about the upside risks to inflation, which include a rapid increase in money supply, the end of possible import-price based downward pressure on inflation and the end of the dampening effect on wages from migrant labor. The downside risks are still there though, which includes the possible weakening of service sector sales. As a result, there are still reasons for pound bears to stay in the game, especially since the RICS house price balance is but the latest piece of data supporting a deterioration in the closely watched housing market and a further decline in the currency pair – the index fell from a downwardly revised –41 to –49.

Japanese Yen

The Japanese Yen managed to retrace a minor part of its recent losses, which is hardly anything to get excited about. Economic data released today was weak, as month on month bankruptcies increased 13.32 percent in May. Likewise, Tokyo Department Store Sales fell 2.9 percent from the same period last year, down from 0 percent experienced in April. Japanese consumer confidence remains low as continued fears of deflation discourage and postpone household spending. US inflation data released today may have come in below expectations, but investors still feel it is likely that the Fed will raise rates in June, increasing carry trade interest in the currency pair.

 

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