The US$ gained overnight ahead of this week’s Fed meeting, and on the heals of weaker than expected European economic news. Despite it being widely expected that the US Central bank will hold rates steady, the commentary that accompanies their decision on interest rate policy will direct trading in the near term. While the market’s expectations for a hike in US interest rates continues to fall, currently with an 8% probability assigned to the likelihood of a quarter percent hike on Wednesday, traders will closely monitor the Bank’s commentary for direction. If Fed Chairman Bernanke continues with his newly found hawkish tone on inflation, increased prospects for rate hikes in the near term will certainly bolster the dollar. However, with the recent release of weaker than anticipated US economic data, led by continued declines in housing, the overall view of the US economy is not overtly positive. Further weighing on the US economy was the lack of progress at this past weekend’s summit of oil producing and major oil consuming nations in Saudi Arabia. While Saudi Arabia did agree to increase output, the pledge was not enough to curb further gains in price per barrel overnight. Similar to the recent G-8 meeting, participants of the Saudi summit only voiced concern over high-oil prices, and stopped short of calling for a stronger US dollar. There is no economic data slated for release today and the market will be squarely focused on Wednesday’s Fed decision. Tuesday sees the release of Consumer Confidence, Richmond Fed and House Price Index. Wednesday sees the release of Durable Goods Orders, New Home Sales data, and the all-important Fed decision on interest rates. The week wraps up with Personal Consumption, GDP, Initial Jobless Claims and Existing Home Sales on Thursday and Personal Income and U. of Michigan Confidence on Friday.
The EUR fell overnight following the release of a worse than expecetd report measuring German business confidence. The Ifo Institute said it’s survey of business confidence in Germany declined to 101.3 from 103.5, the lowest level in over two years. With expectations that the ECB will hike interest rates at its July 3rd meeting to curb inflation, policy makers remain divided as to weather this hike will be enough to contain prices that have accelerated at the quickest pace in 16 years. While it does not appear that this weak economic data will be enough to deter the ECB from hiking rates next week, it does strengthen the argument and that further rate hikes this year will not be necessary. With the Fed’s decision scheduled for this Wednesday, trade will remain in current wide ranges as the market waits for any signs of direction in interest rate policy in the near-term.
The JPY traded within recent ranges, albeit towards the bottom, as the US$ lacks any apparent direction ahead of this weeks Fed decision on interest rates. While it is all but sure that the Fed will leave rates unchanged at this meeting, the commentary following the decision will be reflective of future interest policy direction. It is expected that with inflation seemingly accelerating, the Fed will move to hike interest rates in the near term to stem these gains. If this hawkish stance does prevail, expect gains for the US$.
The GBP was down sharply overnight following the release of a report showing that U.K. house prices fell in June by the most this year. This data led traders to cut bets that the BOE will hike interest rates to curb inflation in the near-term. Andrew Sentance, a member of the central bank’s Monetary Policy Committee, wrote that economic growth will be “much slower” over the coming year and that the BOE will bring inflation back to the 2% target “over a reasonable timeframe”. With further declines in housing prices expected within the U.K., the GBP will remain under pressure for the time being, as interest rate expectations continue to scale back.
