US$ Remians Rangebound as Data Improves
The US$ weakened slightly overnight, albeit within recent ranges as traders continue to focus on the course of US interest rates and the flow of US economic data. Yesterday, the market was presented with a mixed bag of results, showing that inflation pressures in the US are nominal despite the surge in food and energy prices. Also there were signs that economic performance could be improving as measured by a better than expected Philly Fed. This improving data has led the market to determine that the US rate cut cycle has bottomed. Futures markets have currently priced in a 90.0% probability that rates hold steady at 2.0% when the Fed meets on June 25th. There is a 24.2% chance assigned to the likelihood that the bias shifts and rates move higher at the September 16th meeting. The US released Housing Starts this morning at a surprisingly better than expected 1.032 million vs. expectations of a 939k reading. This data showed a gain of 8.2% in April. At 10:00 a.m. University of Michigan Confidence is to be released expected to decline to 62.0. With better than expected housing data released, the US$ could enjoy a significant rally, should confidence show a rebound.
The euro gained overnight after comments from an ECB policy maker suggested that interest rates would remain steady this year within the Eurozone. ECB Member Liebscher stated that he sees inflation risks “tilted to the upside,” and that there is no room “for an interest rate cut in 2008.” These comments, despite being very hawkish did not push the euro from its recent ranges. The reason for this is likely the release of very weak French payroll data. French non-farm payroll data grew at the slowest pace since the fourth quarter of 2006, as the economic slowdown affecting the US seems to be spreading to the larger economies of the Eurozone. Within this backdrop of hawkish commentary from the ECB and data clearly pointing to economic slowdown, traders will likely continue to push the euro lower at a measured pace.
The yen continues to trade in very tight ranges as the “carry trade” reemerges amidst an apparent calm returning to credit markets and investors seemingly willing to adopt more risk on their balance sheets. With Japanese rates at 0.5% and likely to push lower over the coming months, as signs of a Japanese slowdown persist, the yen will continue to remain the preferred vehicle to finance positions across other markets. This will certainly keep a downward bias on the Japanese currency.
The pound traded in rather flat ranges overnight as the market continues to take a “wait and see” approach to Bank of England monetary policy. With inflation pressures seemingly rising throughout the UK, Mervyn King and other policy makers have found themselves in a difficult situation. The UK housing market is under terrible strain, while the consumer is beginning to curb spending. This would typically force the BOE to lower rates; however, with inflation pressures the Bank is taking a sideline position. This will likely keep sterling relegated to tight ranges with a slightly downward bias.
