US Dollar (USD) Steady as Fed Fund Futures Price in at Most, a 25bp Cut by Dec (page 1 of 2)

DailyFX Fundamentals 01-15-07

By Kathy Lien, Chief Strategist of www.dailyfx.com

US Dollar

With the US markets closed for Martin Luther King Jr. Day, it not surprising to see currency trading grind to a halt after the London close. Even though there was no US economic data released today, it does not undermine the fact that this will be a busy data week. The main focus here in the US as well as globally is inflation. Both consumer and producer prices are due for release this week in addition to the Treasury International Capital flow report, the Empire State manufacturing index, the Philadelphia Fed index and the Beige Book report. On balance, the reports are expected to be positive for the dollar, but after such an extensive rally last week, the question is whether there are actually any actually buyers left in the market. According to both our speculative sentiment index and the Commitment of Traders report, there may be. Although both indicate that the market has turned long dollars, neither is anywhere near extreme levels. Since the beginning of the year, we have received a lot of US economic data that indicates that the entire market from analysts to traders have underestimated the resilience of the US economy. Over the past week, we have seen across the board revisions to fourth quarter GDP data with some analysts even projecting growth in excess of 3 percent thanks to a narrower trade deficit, stronger retail sales and a healthy labor market. The drop in oil prices has boosted GDP and encouraged traders to abandon any thoughts that the Federal Reserve will opt to lower rates in the first half of the year. This sentiment is reflected in the Fed Fund futures which went from pricing in a 70 percent chance of a first quarter rate cut at the beginning of last month to a nominal chance of a 25bp cut by the end of this year. We start the busy data week tomorrow with the Empire State manufacturing survey. Having not felt the drag that we saw in the Philly Fed index last month (it turned negative), the survey of manufacturing conditions in the NY region is expected to continue to drop in the month of January.

Euro

After extensive losses over the past two weeks, the Euro has started the third trading week of the year on firmer footing. Despite the price action, economic data released this morning was weaker than expected with industrial production growing by only 0.2 percent in the month of November. The market was looking for a monthly rise of 0.7 percent, but sluggish growth in France and Italy led only a minor growth of 0.2 percent for the region as a whole. Comments from ECB officials today have been mixed. ECB members Liebscher and Quaden were slightly hawkish, having said that rates are on the low side while Tumpel-Gugerell sided with the doves. Overall, this tells us that one more rate hike is still in the cards, otherwise the comments from ECB officials would be far more neutral. However the next rate hike which will probably be in March or April could also be the ECB's last. That is the message that ECB President Trichet left us with last week and it is also the message that the Euro's price action is reflecting. Looking ahead, we have the German ZEW survey due out tomorrow morning. The survey of analyst sentiment is expected to continue to rebound after hitting a 13 year low in the month of November. The trade data and IFO report suggest that the VAT tax has yet to become a worry for most German corporations. The recent weakness in the Euro and the drop in oil prices make the outlook for exports even more promising.