US$ Settles into Quiet Ranges Ahead of Data
The US$ traded in rather flat ranges overnight as the market continues to digest yesterday’s benign US inflation report and ahead of US economic releases today. Yesterday, CPI was released at a much lower than forecast annual reading below 4.0%, despite record high energy prices and food prices climbing to 10-year highs. This data caused the market to pause in its mounting expectations of the timing of the Fed’s shift to a hawkish bias on rates. Futures markets have reduced their expectations of a Fed September rate hike to now 24.3%. Despite this weaker than forecast inflation data, the US$ remains well supported by the view that the US economy is emerging from its recent economic slowdown. Traders will certainly focus on US economic releases this morning to gauge the health of any such recovery. At 8:30 a.m., weekly jobless claims are to be released expected to push higher to 370,000 indicating continued sluggishness in the overall job outlook. At 9:00 a.m. TIC flow data is expected to show a decline of foreign inflows to $62.5 billion. 9:15 a.m. yields the release of Industrial Production and Capacity Utilization data expected to decline 0.3% and register 80.1% respectively. At 10:00 a.m. the Philly Fed is to be released expected to register a gain to –19. Any signs that data releases today show continued bottoming in the economy should ultimately be US$ supportive, else look for the US$ to weaken in current ranges.
The euro continues to consolidate in recent ranges as traders look to a cessation of the widening interest rate differential between the US and Eurozone. This view gained traction as the Fed signaled last week that rates were likely to remain on hold and the US economy appears to be bottoming. Despite the Eurozone releasing data overnight showing that the economy grew 0.7% in the first quarter vs. expectations of a 0.5% gain, traders remain focused on the prospect that the Eurozone will slow significantly later this year. This has led some to speculate that ECB will push rates lower this year as the Bank aims to jumpstart economic growth. This should ultimately push the euro lower.
The yen continues to remain weak as traders focus on stability returning to markets and cautiously reintroduce risk to their balance sheets. With Japanese interest rates at 0.5%, traders continue to favor using the Japanese currency as a preferred vehicle to finance positions across other markets. Expect this trend to continue for some time as the yen will likely continue in its role as a proxy for market risk. The longer the period that calm descends upon markets, the greater the likelihood we see further prolonged yen weakness.
The pound also continues to have its fortunes ultimately determined by interest rate expectations. Currently, the market remains uncertain about the course of interest rate policy from the Bank of England amidst two very differing factors. While inflation pressures continue to accelerate, the UK housing market continues to come under significant duress. This has forced the BOE to balance the benefits of inflation fighting with stimulating economic growth. The result has been uncertainty in markets as traders look to the Central Bank for direction, leading ultimately to sterling pushing lower.
