US$ Firms Further After Retail Sales Data
The US$ rose overnight as a view overtakes the markets that the Fed has ended its cycle of rate cuts and that the US economy is nearing a bottom. This view will come sharply into focus later this afternoon when speeches by Fed members Hoenig, Yellen and Fisher all focus on the outlook for the US economy and the course of inflation and interest rate policy. With the Fed seemingly halting cutting rates, futures markets have assigned a 12.0% probability that US rates move higher to 2.25% at the September meeting. Traders will be watching the flow of US economic data this week. At 8:30 Import prices are to be released expected to gain 1.6%. In addition retail sales are to be released expected to decline 0.2%. Should this data show robust inflation pressures or better than expected consumer spending, expect the US$ to enjoy further gains.
The euro fell overnight, reversing most of yesterday’s gains as traders again focus on the likelihood of the interest rate differential between the US and Eurozone narrowing this year. Despite comments yesterday from ECB Chief Trichet that the current rate position of the Central Bank is adequate to counter inflation pressures, the euro reversed course overnight. This reversal is likely predicated on an emerging view that Eurozone growth rates will slow later this year, forcing the ECB into a more accommodative rate posture. This stance will be in sharp contrast to the US Fed and likely further decrease the appeal of the euro in favor of the greenback.
The yen continues to consolidate in ranges, as its direction remains ultimately defined by the “carry trade” and the market’s appetite for risk. With equity markets in Europe and Asia declining moderately overnight, the yen gained slightly. However, the ultimate course for the currency will be determined as investor appetite for risk grows. With the credit crisis seemingly nearing an end and the US economy appearing to weather the current economic slowdown, equity markets will likely soon again rise, financed with short yen positions leading the Japanese currency lower.
The pound fell overnight as traders focus on the likelihood that US interest rates are near a bottom and uncertainty continues to surround the course of UK Central Bank policy. With signs that inflation pressures are robust, while the housing market continues to shrink, UK policy makers will likely refrain from any policy decision for some time. This will certainly enhance the appeal of US$ assets as the Fed has all but signaled an end to rate cuts, ultimately weighing further on the pound.
