Currencies: EUR/USD Hit By Poor European Eco Data

On Monday, the explanation for the price action in EUR/USD was straightforward. EUR/USD was hammered by the poor European data as the German IFO index declined more than expected while the European PMI fell below the 50 mark, suggesting that growth in Europe has come to a standstill. So, while the single currency still got the benefit of the doubt at the end of last week, it proved also vulnerable to poor economic news from the region yesterday. EUR/USD traded above/at the 1.56 area in Asia and early in European trading, but started to cede ground as soon as the first regional PMI data hit the screens and the sell-off accelerated after the publication of the European PMI and the IFO. The fact that there was no US eco news to counterbalance the poor European data this time was a support for the US currency. So, while it looked on Friday as if EUR/USD had still some kind of safe haven role to play, this feeling was overthrown yesterday and EUR/USD lost its Friday gains and closed the session at 1.5518 compared to 1.5606 on Friday.

Today, the European calendar is thin, but in the US the CS house prices, the Richmond Fed index from the manufacturing sector, the weekly retails sales and the consumer confidence for June are on the agenda. Interesting to see whether, these data, if weak, could again trigger some kind of counterbalance move on yesterday's EUR/USD decline.

Already for quite some time we have a neutral bias on EUR/USD. The economic data both in the US and Europe point to ongoing slow/declining growth but the Fed and the ECB have not many options to address this problem. In this context of low visibility on the US and the European economy, we assume EUR/USD to extend the sideways trading pattern between 1.6020 and 1.5285.

The data and the signals from central bankers still have the potential to cause intraday swings, but at least for now, the news from both sides obviously contains is no strong enough trigger for a directional move in EUR/USD in one way or another. The technical picture recently showed decent resistance in the 1.5650 area and in the 1.5810/40 area. In this context we still prefer to play the current sideways range by a sell-on-upticks approach. Tomorrow's Fed interest rate decision and communiqué will be the next important event to see whether the sideways approach in EUR/USD can be maintained.

Major Market Mover: Confidence On The Way...

As the U.S. economy is preparing this week for the big fat FOMC decision on monetary policy, and as the meeting starts today, investors are eagerly waiting for what fundamentals from the economy might say before that release which might change the expectations for tomorrow's call.

Consumer confidence as reported by the conference board supposedly fell to 56 for the month of June, down from 57.2, marking the lowest since 1992 and ringing the bells of danger that the U.S. economy is still facing a lot of pressure, and the future of the personal spending despite those tax rebates might not be very bright.

Food and energy prices are still skyrocketing, cutting from consumers' pockets and kicking inflation levels up the sky, while growth is still dampened by less overall spending and with the consequences of the undergoing credit squeeze.

Fears from higher inflation and less growth might tie the Feds hands to move rates; stagflation might be an upcoming phase for the economy if it continues on the same pace, unless the fiscal stimulus which I consider a very smart preemptive strike from the fed was able to pick up growth levels.

Today's report might not be the end of the world for the economy, but it sure gives a very clear view on what people think about their economy, and do they actually believe that the worse is behind us or not, and the answers of those questions are not easy, and what consumers believe is very important in the economical equation.

Dear folks, let's wait and see what today's fundamental might say about the economy, and lets keep our breaths held for tomorrow's rate decision, where the final word for the fed will move markets in any possible way.

FOMC: Preview of Policy Meeting

Overview:

On Wednesday night at 20:15 CET the Federal Open Market Committee (FOMC) will announce its policy rate decision. In line with the market we expect the FOMC to keep policy rates unchanged at 2.00%. Focus will be on how much the committee will toughen its language. We expect the FOMC to adopt a rela-tively neutral stance, possibly with a slight weighing towards inflation concerns. Markets are currently pric-ing more than 50% probability of one or several hikes by September. We doubt that the statement will be sufficiently tough to ratify such a pricing. Hence, going into the meeting we asses risks to bond yields - par-ticularly in the short end - to be skewed to the downside.
Activity:

Since the 30 April meeting risks of a deeper downturn have abated somewhat. Firstly, financial markets have stabilised, although significant strains remain. Secondly, activity data have not deteriorated as much as feared - partly owing to a quick impact from the tax rebates. That said the activity outlook remains sluggish, as headwinds from tighter credit, rising commodity prices and the housing downturn remain in the equation. The statement is likely to acknowledge improvement in financial market conditions and less down-side risks to growth. That said, the weaker labour market, tighter credit conditions, the housing correction and the rising commodity prices will be mentioned as downside risk factors.
Inflation:

While core inflation data have shown a slightly more favourable development over the past months, there are few signs of an easing in the underlying trend. Moreover, the lack of response in global commodity markets is adding concern that the US slowdown is not able to generate any persistent easing in headline in-flation through a slowdown in commodity prices. This is now adding upside risk to inflation expectations, which by some measures have recently shown signs of de-anchoring leading to increased concern among many FOMC members. While the overall outlook for inflation will probably be little changed, the FOMC is ex-pected to add further emphasis to its inflation concerns.

Foreign Exchange Market Daily Update

The US dollar strengthened for the second day against a basket of currencies after a positive jobless claims report. Initial claims last week fell to 381,000 from 386,000 the week earlier but on average the indicator is rising.

The euro weakened against the dollar after comments from the chairman of euro finance ministers, Juncker. “High euro zone inflation is a worry for governments in the region as well as the European central bank and governments too must fight it”. Inflation is at a record high 3.7% year over year which is almost double the target of 2.0%.

Sterling rallied against the dollar after a surprise spike in retail sales. Year to date sales rose 8.1%, the strongest level since April 2002. Retail sales last month rose 3.5% versus expectations of a -0.1% fall. This is a glimmer of hope in the otherwise sagging UK economy. Investors are still pricing in a lower than 50% chance the central bank will raise rates in the short term.

The Japanese yen traded slightly weaker but off its weekly high after a survey showed business pessimism is spreading from the manufacturing sector to the country's service sector. Businesses cite the cause is due to a weakening domestic demand caused by rising raw material costs. The worsening outlook is likely to keep interest rates on hold at 0.50%.

The Canadian dollar rose to its highest point in 2 weeks after a higher than expected CPI reading dampened expectations the BoC would cut rates. CPI rose 2.2% from 1.7% a month earlier. Looking further into the report, gasoline prices were pushed up 15% from last month alone.

More Mixed US Data

More weak data continues to stream out way from the US economy as while the feds are now directing their fears towards price stability that does not entirely rule out that economic performance is up and about.

Rising after reaching the brinks of recession is to be further prolonged especially as rising commodity prices is deterring further disposable income.

Spending that accounts for 2/3 of the economy is a matter to support growth as the monetary and fiscal policies were aimed at helping Americans to continue spending in to support growth while helping them withhold their living standards after thousands of Americans lost their homes and their wealth in the wake of the mortgage market collapse.

Today's weakly jobless figures reflected ongoing softening in the labor market that should prevail for a longer period and as Bernanke said more weakness is to emerge in the sector. Claims dropped the least in two weeks by 5,000 from the weak before to 381,000, which are still approaching the upper red line zone of 400 thousand claims which is very reflecting to weak economic conditions. Meanwhile continuing claims declined to 3060 thousands the lowest since April yet still much above last year's average.

Calmness Rule Markets Regardless Bad U.S. Data

Calmness and thin trading still dominates markets in the U.S session, currencies are still wondering in very narrow ranging despite the release of some medium effect bad fundamentals from the U.S. economy.

The start was with the weekly jobless claims which declined to 381K from 384K last week, while the expectations were to see a decline to 375K, and that what made the difference.

The most waited releases today, the Philly Fed Manufacturing index sank way more than expected and even than the previous to -17.1, while expectations where to see a decline of 10 after a decline of 15.6 in May. Leading indicators a somehow lagged figure for the economy increased by 0.1%.

The news did not leave much of an effect on the currencies who chose to keep their supports and resistances intact for no major triggers are to break them, Euro maintained its very early high at 1.5585 and did not sink below 1.5465 as the lowest trading point for the day.

The British pound remains the biggest winner today, after reaching to a high of 1.9725, maintaining its early morning low at 1.9575, and settling around 1.9700.

The Japanese currency was the most stable amongst all, ranging between 108 and 107.70 after reaching a low of 107.40 in the morning time, the currencies does not look like it’s going to be able to break any of those levels till a trigger comes along and makes it.

Markets are still waiting Mr. Paulson speech today and see if it carries any thing new about the economy, as fundamentals for this week are done, especially in the U.S. markets

Yen Broadly Lower

The Japanese yen and Swiss Franc remain the weaker major currencies as the week starts. While there was not specific mentioning of the currency markets in the post G8 meeting statement, the group of finance ministers raise concern that rising commodity prices is now becoming the biggest threat to the world's economy. The statement said that "elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable, and may increase global inflationary pressure.

" The statement echoed recent comments from Fed and ECB officials on the threat of inflation and was supportive to market's speculation that both are on the road to rate hike. While Asian Stock markets do stage a strong rebound today, weakness in yen and swissy is believed to be more related to expectation of widening rate gap rather than improvements of risk appetite.

Talking about inflation, Eurozone HICP final will be released today and is expected to be at 0.6% mom, 3.6% yoy in May. ECB Tumpel-Gugerell said that inflation would remain above 3.0% in short term and the current high reading of 3.6% should be interpreted as a warning signal. Released in early US session, Swiss retail sales climbed 2.4% mom in Apr, above expectation of 2.0%.

In the US session, Empire state manufacturing index is expected to stay negative at -3 in Jun. NAHB housing market index is expected to be unchanged at 19 in Jun. TIC capital flow is expected to drop to 75b in Apr.

US Dollar Drags On Stagflation Fears

The US dollar fell for the second round of trading this week as fresh economic data spurred stagflation concerns, and led the Canadian dollar to pick up the biggest gain against the greenback. The appreciation supported a minor rise in the high yielding Australian and New Zealand dollar as the pairs rose to 0.943 and 0.755, respectively. On the other side of spectrum, the low yielding Swiss franc strengthened to close above 1.04, and was followed by the Japanese yen as it close just under 108. Expectations of a rate hike next month supported the euro to close above 1.55, while the British pound was the only currency to decline against the greenback as the pair dipped to 1.955.

Rising commodity prices raised concerns that the US economy may fall into stagflation as housing starts fell to a 17 year low of 975K from 1008K in April amid a rise in producer prices. The jump in commodities has led the headline figure to rise for the eighth consecutive month to 7.2 percent from 6.5 percent, while the core measure continued to hold at 3.0 percent. The Labor Department also added to the slew of downbeat data as they highlighted a less than expected rise in industrial production to -0.2 percent from -0.7 percent, with productivity cooling to 79.4 percent from 79.6 percent.

A statement by Goldman Sachs spurred bearish sentiment in the stock markets as the giant investment firm forecast the banking sector to raise an addition $65B in new capital to offset the losses incurred by bad loans. As a result, the DJIA 108.78 points to 12,160.30 points, with 27 of the 30 components declining. The broader S&P500 dipped 9.21 points to hold off at 1,350.93 points amid 231 stocks falling to a fresh 52 week low.

The lack of improvement in the housing sector paired with mounting pressures in the financial sector increased the appeal of US Treasuries, and led many risk adverse investors to seek the safety of risk free bonds. As a result, the benchmark 10-Year yield fell to 4.209 percent from 4.269 percent, while the 2-Year yield plunged to 2.907 percent from 3.044 percent.

Looking forward, the MBA mortgage applications index is the only scheduled release for the US tomorrow, but market participants expect increased volatility for the US dollar on Thursday as Fed Vice Chairman Donald Kohn is scheduled to testify at a Senate hearing. The leading indicators index is also due out for release on Thursday, with economists forecasting the index to stall to 0.0 percent from 0.1 percent in April.

USD Falls On New Signs Of Stagflation

The dollar traded lower on further signs of stagflation Tuesday as US producer prices jumped more than expected and industrial production unexpectedly fell. The greenback is also pressured by reduced interest rate expectation on reports the Federal Reserve will not hike interest rates anytime soon. We believe the Fed has lowered rates too much. The Fed needs to lend freely to troubled banking institutions to ease the credit crunch and prevent systemic risk in the financial market, but it needs to do so at a significantly higher rate to avoid creating more inflation. The sooner the Fed hikes rates, the better for the US economy and the dollar.

The weakness in the real economy should be addressed by fiscal policy, preferable tax-cuts; the negative real Fed funds rate only makes the economic situation worse. Sterling was even weaker than the dollar as UK inflation rose but the Bank of England seemed unlikely to address the problem.

The USD/JPY fell slightly as US stocks declined on renewed financial-sector worries and more signs of economic weakness. The pair has been testing the 108-area resistance the last few days and the test is still not over. If this resistance is penetrated, the pair will rise to 110. There is support in the 106-area.

Yen Traders Look To BoJ Minutes For Forecasts On Growth, Inflation

On the back of strong economic data, the yen managed to recover some lost ground against its US counterpart, with the USDJPY pair trading back below 108.00 today. Tertiary Industry Index and Machine Tool Order figures both pointed to expansion; though the outlook for fading growth going forward seems to be little changed considering the path of consumer spending and trade activity.

Looking ahead, Store sales and Coincident Index figures provide low-level economic event risk for fundamental traders to work with. In addition, the BoJ minutes may give a reading on the policy group's outlook for inflation and growth in the months ahead.

Pound Unexpectedly Drops On BoE Forecasts Of 4 Percent Inflation

Under normal circumstances, high inflation readings and expectations are a guaranteed currency booster. This was the thinking going into today's UK CPI numbers. The consumer basket reported a 0.6 percent rise in headline inflation through the month of May that boosted the annualized figure to a decade high 3.3 percent clip. Though, considering the core annualized number ticked higher to a 1.5 percent pace, it was clear that most of the pressure was found in volatile components like food and energy.

Nonetheless, with headline inflation at a decade high and above the 3.0 percent tolerance limit; BoE Governor Mervyn King, for the second time since the central bank was made independent in 1997, had to write a letter to the Chancellor of the Exchequer detailing why inflation was so high and what would be done to curb it.

Forecasts for price growth to top 4.0 percent in the second half and remaining above target into 2009 suggested action was necessitated. However, this was immediately cut short by comments that 'the path of the bank rate that will be necessary to meet the 2 percent target is uncertain” and 'the committee will maintain price stability by ensuring that the rise in inflation is temporary.” Without action on the BoE's part, inflation at these levels is merely a burden on growth - and therefore the pound - going forward.

Dollar Finds Little Help From Heavy Concentration of Data

Tuesday's US economic docket offered the dollar its most concentrated event risk for the week; yet the otherwise volatile data would deliver few surprises for a market that is already veraciously discounting future Fed rate decisions. The morning opened with a range of data that would cover both growth and inflation trends. With futures traders considering a quarter point rate hike in September a near certainty, there an obvious interesting in the produce price index for May.

Upstream inflation pressures accelerated more quickly than expected to a 7.2 percent annualized pace that fell just short of the multi-decade high set just a few months back. Even when the 4.9 percent jump in energy costs and 0.8 percent increase in food prices were excluded, the core figure would notably match its own 16-year high. However, considering the market's focus on the cost at the pump in the grocery line and the fact that the front-line CPI numbers were released last Friday, this data added little to the mix. For growth, the session's data was not encouraging for the greenback.

The housing market - the US economy's anchor - reported an ongoing drop in construction. Housing starts slipped 3.3 percent to a 17-year low and permits for future projects fell 1.3 percent as demand sufferers from evaporating home values, ballooning inventories, rising mortgage rates and plunging consumer confidence. The business community was similarly under pressure with industrial production contracting 0.2 percent and capacity utilization edging down to a new three-and-a-half year low.

To top it off, trade activity was lending little help to expansion despite the dollar's recent record lows. The current account deficit for the first quarter ballooned more than expected to a $172.5 billion shortfall owing largely to rising fuel costs burdening the physical balance and reduced foreign investment curbing net income.

US: weak payrolls figures, but in line with expectations

In May, non-farm payrolls fell by 49K, close to the estimated job loss of 60K. The average weekly hours worked stayed unchanged as well as the manufacturing hours, but the aggregate hours worked dropped by 0.1% M/M following a 0.4% M/M decline in April. Hourly earnings on the other hand increased with 0.3% M/M, up from 0.1% M/M previously, but given the surge in inflation, the rise in labour income is insufficient to stimulate spending.

Looking through the various sectors, the construction and manufacturing payrolls showed smaller losses than in previous months, but Professional services, which rose unexpectedly in April, registered again sharp losses, including at Help Agencies, the leader of overall payrolls. The diffusion payrolls slipped further below 50, indicating indeed broad-based losses. These figures were in line with the expectations, but nevertheless should be considered weak. Payrolls declined for 5 months in a row.

More surprising was the unemployment rate, which jumped from 5.0% to 5.5% against the expected 5.1%, the highest level since October 2004. However, these results are partially influenced by an extraordinary increase in the number of young people entering the labour force at the end of the school year and to the 5 week interval between the previous payrolls survey week, which might have impacted the seasonal adjustment. So, the risk is for the unemployment rate to fall (slightly) in the next months. Overall, the payrolls should be considered as disappointing, but not disastrous.

Vulnerable Dollar

Shocking US data came out to retrieve back fears in the US economy, unemployment jumping up to 5.5% as this is considered to be the biggest gain in 1986, the existence of those worse than expected news pointed out that the growth of the feds land will remain soft if it really did not dip more and more in a recession.

Due to the negative data released on Friday most currencies gained against the US dollar, especially the Euro because it just needed some momentum to make it skyrocket once again to all time high levels. Yet due to this surge the pair is falling in an overbought area making badly need a slight correction in order to continue its bullish movement, but still eyes are all headed toward the US data for this week, whereas market participants are just waiting for more confirmations to see to what level of recession the US had fell into.

Secondly the Royal currency was boosted indeed, retrieving some of the losses that they faced in the past week, where the trading range for the next couple of hours might be falling between 1.9752 and 1.9614; the technical indicators really points out some chances to see the pair climbing against the US dollar, but still slight correction might be taking place.

The USD/JPY pair fell from the 106 levels affected by the negative data which where released on Friday, as now it's trading at 105.24 levels; and technically the pair might be continuing the heading to the down or at least trading in the 105 levels and the trading range for today falls between 106.21 and 104.60.