US Dollar Shrugs Off Stronger Inflation and Housing Data (page 1 of 2)

DailyFX Fundamentals 01-17-07

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


US Dollar

The US Federal Reserve has kept interest rates steady for over 6 months now and today's data releases suggests that they could continue to leave rates at 5.25 percent for another six months. Not only did producer prices increase more than expected on both a headline and core level thanks to higher oil prices in December, but industrial production also accelerated by the fastest pace growth in five months. Even though we have seen a slowdown in the regional manufacturing reports, the industrial production report seems to have aligned well with the strength that we saw in the national ISM index. What is even more encouraging though is the fact that homebuilder sentiment rose to a 6 month high. The increase in buyer traffic suggests that the housing market may be bottoming. With inflation remaining high, the labor market improving, the housing market bottoming and consumer spending accelerating, the Federal Reserve has no reason to change their current monetary policy stance. The only piece of disappointing data released today was the Treasury's report on net foreign purchases of US securities. The market was looking for inflow valued at $75 billion, but actual inflow was only $68.4 billion. The details of the data indicate that the biggest demand was for corporate bonds by private investors. Central banks continued to be net buyers of dollar denominated investments, but their purchases have been slowing. Given that the inflow is still in excess of the same month's $58.2 billion trade deficit, the report was not entirely dollar bearish. The Beige Book report was mixed, though the tone still contained more hawkishness. Even though the individual districts saw expansions in manufacturing and retail sales along with a tighter labor market, at the same time, they felt that the housing market was continuing to soften. Looking ahead we are expecting consumer prices, housing starts, leading indicators and the Philly Fed report tomorrow. We continue to expect more dollar positive news since CPI has a good chance of rising like PPI. The rebound in homebuilder sentiment also suggests strength in housing starts. Although it is worth noting that Fed Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, we doubt that he will veer away from his topic on the "Long Term Fiscal Challenges" that the US faces.

Euro

The Euro is holding on strong in the face of firmer US data. This morning's inflation data was in line with expectations. Consumer prices rose 0.4 percent in the month of December which left the annualized pace of growth unchanged at 1.9 percent. The YoY core price growth also remained unchanged at 1.5 percent. The trade surplus in the Eurozone fell short of expectations, but the revision in the prior month was quite substantial. None of the European data was market moving, but it seems that Friday's 1.2866 low is proving to be strong support for the EUR/USD. Given the strength of today's US data, if consumer prices also prints strongly, then there is a good chance that the currency could attempt to test that level. There is no meaningful Eurozone data due for release tomorrow, but the ECB will be releasing their monthly bulletin which could shed some light on the current economic situation as well as the outlook for inflation.

British Pound

The British pound continues to be one of the best performing currency pairs in the market.