Wednesday June 15, 2005 - 10:00:02 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar waits for data barrage
The Euro strengthened to 1.2150 against the US dollar, but it was unable to make significant gains after the US data, continuing the recent pattern, and the Euro weakened back towards 1.2030. The Euro briefly dipped to a fresh nine-month low before staging a weak rebound and was trading close to 1.2040 in early Europe on Wednesday.
There was a 0.5% headline decline in US retail sales for May after an upwardly revised 1.5% increase for April while there was an underlying decline of 0.2%. There will be some fears over consumer spending trends, but major concern is unlikely at this stage.
There was also a bigger than expected 0.6% decline in producer prices for May after a 0.6% increase the previous month, while there was a modest 0.1% increase in the underlying rate. The decline, however, primarily reflected lower oil prices and the reversal in energy prices this month will raise speculation that producer prices will rise strongly in June. The consumer inflation data will be watched very closely on Wednesday, especially for the underlying consumer inflation rate and a low figure could dampen rate expectations.
The economic data so far has not been enough to trigger a significant reassessment of US economic prospects, The impact of the data was also offset by comments from former Fed Governor Blinder who stated that he would be surprised if the Fed stopped increasing interest rates before they reached 4.0%. Fed Governor Poole also called on the Fed to keep inflation under control, but also suggested that recent inflation control gave the Fed greater flexibility to be more aggressive with policy. A series of weak data would have a more significant effect and certainly could have important medium-term currency implications.
There is still evidence of investor demand for Euro put options which suggests that the Euro will still be vulnerable to selling pressure in the short term. There will be further fears over the economy and concerns over political stresses ahead of the EU summit on Thursday and Friday. The markets have, however, now discounted a lot of bad Euro-zone news and this should limit the potential for further selling pressure. EU Monetary Affairs Commissioner Almunia suggested that a 1.18-1.30 Euro range against the dollar would be in line with normal market fluctuations which suggests that the EU will not push for further sharp Euro depreciation.
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