The US$ was mixed overnight, falling against the GBP and consolidating in recent ranges against the EUR and JPY. The US$ remained within these ranges even after the release of worse than expected jobless claims registering 381K vs. 375K forecast, revealing continued weakness in the labor market. Later this morning, the Philadelphia Fed’s manufacturing report is released, expected to register –10. Following the recent disappointing Empire Manufacturing report, any signs of continued regional weakness could support the market’s negative outlook for the US economy in the near- term. These expectations of a slowing US economy have been reflected recently in interest rate future markets. Currently these markets reflect a 48.0% probability of a 25 basis point Fed rate hike by the Bank’s August meeting, down from 90.0% two weeks ago. These diminished interest rate expectations, coupled with the apparent sluggishness of the US economy will weigh on the US$ for some time.
The euro slipped within recent ranges as the market consolidates ahead of the Fed’s June 25th meeting. Although the US Central Bank is not expected to alter rate policy, Expectations remain in place that the ECB will hike rates at its July 3rd meeting further lending support to the common currency. Interest rate differentials and expectations continue to remain the driving force behind the direction of the euro. This should keep the euro well bid for some time.
The yen continued to trade within recent ranges overnight. The currency direction remains guided by the market’s use of the “carry trade.” As traders use the currency to finance positions in equity markets, the direction of the yen has been closely tied to these markets. Weakness in Asian and European bourses this morning contributed to some limited yen strength, however, it will be the direction of US equity markets today that ultimately contribute to the currency’s direction. Over the next several months expect ranges in the yen to prevail.
The pound strengthened overnight following the release of much better than expected retail spending data in the UK registering a gain of 3.5% vs. an expected 0.1% decline. This data surprised the market as traders had expected consumer spending to slow in tandem with a weakened housing sector. In addition, BOE Governor, Mervyn King, called for the need to focus on inflation, and not growth. The apparent resilience of the consumer, accompanied by a more hawkish stance by the Bank of England, has reintroduced the possibility that UK rates will be moving higher sooner rather than later. These shifting expectations helped bolster sterling overnight.
The Swiss franc fell overnight, following the Swiss National Bank’s decision to hold rates steady at 2.75%. The Bank stated that all signs pointed to recent inflationary pressures to be “temporary”. This move surprised the market as traders had expected the SNB to adopt a posture similar to their brothers at the ECB and therefore led to a significant selling of the franc.
