US$ Gains as Data Disappoints, KC Fed President Tells Fed to Raise Rates
The US$ was stronger overnight on a combination of hawkish comments from a Fed official and weak data abroad. The Kansas City Fed President, Thomas Hoenig, stated that “serious” inflation pressures might compel the Fed to raise interest rates. Though Hoenig likely has a minority opinion in the Fed at this time, a sharp pickup in the U.S. economy from its current slowdown could see the Fed change its stance quickly. On the economic data front, there is not much released in the U.S. today that should change the greenback’s strength. At 8:30 this morning, data on nonfarm productivity showed an increase of 2.2% in the first quarter, up from 1.5% the previous quarter. At 10:00 a.m., pending home sales is expected to show a decline of 1.0%. It is likely, however, that the market will begin to focus on the central bank meetings in Europe.
The euro was weaker overnight following data that showed retail sales in the Eurozone fell by 0.4% on a month over month reading, compared with expectations that sales would rise 0.2%. On an annualized basis, retail sales fell 1.6%, compared with expectations of a 0.7% decline. This data adds to expectations that the ECB will signal that they are becoming concerned with growth and downplay risks to price stability following its meeting tomorrow. The change could signal that the Bank might lower interest rates at the end of this year. Combined with the shift in Fed policy at its last meeting, a change could significantly undo the euro’s gains this year. Should the ECB continue its rhetoric on inflation, the euro will likely reverse some of its recent losses.
The yen was weaker overnight as broad US$ gains helped the currency gain against the yen. Yesterday’s reversal in equity markets, from moving lower early in the day to finishing slightly higher, has renewed a bid in the dollar against the yen. Today, equity markets in the U.S. look to open flat. Walt Disney Company reported better than expected earnings for the first quarter, helping to restore confidence that consumers will not stop spending despite weaker economic conditions. Overseas, equity markets are higher.
The British pound was lower overnight following weak industrial production figures. Ahead of the Bank of England meeting tomorrow, the weak figures have some in the market fearful that the BOE might lower interest rates. Though economists largely expect the Bank to remain on hold, the BOE has been known for surprising the market. Therefore, expect weakness to persist through the BOE meeting tomorrow morning.
