US$ Consolidates Ahead of Busy Data Week

The US$ traded in steady ranges overnight after Friday’s selloff ahead of a slew of US data this week as traders attempt to gauge the health of the US economy and future policy initiatives from the US Central Bank. While there is only limited data to be released today, with Leading Indicators scheduled for release this morning at 10:00 a.m. and expected to register a flat reading. With an uncertain outlook concerning the timing of any US recovery prevailing the markets, traders have assigned an 88.0% probability to the likelihood that rates hold steady at 2.0% through the Fed’s August meeting. However, it is at the Fed’s September meeting that rates could increase 25 basis points to 2.25%. This view should ultimately provide the US$ with some upward bias. Later this week, other data is to be released which will likely steer the US$’s direction. Tomorrow sees the release of PPI, expected to show a marginal gain of 0.4%, indicating little inflation pressures. Wednesday sees the release of Mortgage applications and the minutes from the last Fed meeting. Traders will carefully parse these minutes to determine the bias of the US central bank in determining the direction of rates at meetings later this year. The week winds to a close with the release of Existing Home Sales expected to decline 1.6%, indicating continues weakness in the sector. Expect the US$ to remain rangebound through most of today as traders focus on the release of data later this week, and will be unlikely to commit to any particular bias.

The euro held steady in ranges overnight after Friday’s significant advance, as uncertainty prevails the outlook for both US interest rates and the overall economy. While the ECB appears committed to holding rates steady for some time, traders remain uncertain about the timing of any rate hikes from the US Central Bank and whether the US Fed has truly completed its easing cycle. Until there is some clarity on both factors surrounding the US outlook, expect trade to keep the euro well supported in recent ranges.

The yen continues to stumble in recent ranges as the “carry trade” dominates overall price action. Traders continue to use the low interest rates afforded by the Japanese currency as a backbone to financing positions across a broad spectrum of other markets. However, with some of the higher yielding commodity currencies, such as the Aussie and Kiwi, now coming under pressure, the yen has enjoyed some limited gains. With these duel factors in play, the yen will likely continue to remain relegated within current ranges.

The pound also continues to consolidate in recent ranges as traders attempt to guess the next policy action from the Bank of England. With consumer spending slowing and the housing market remaining under duress, one would expect UK rates to fall. However, with energy prices at record highs, inflation pressures have begun to surface, suggesting that the UK Central Bank will delay the timing of any rate cuts. These conflicting factors continue to steer the pound within its current ranges.