Dollar Weakens after US Announced Plans to Increase Strategic Oil Reserve (page 1 of 2)

FXCM - DAILYFX Fundamentals 01-23-07

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

US Dollar
President Bush is set to give his State of the Union Address tonight and the US dollar is weaker going into it. Political and economic references will be our main focus as traders look for Bush's comments on Iraq, Iran, oil and jobs. For the first time since his Presidency, Bush will be addressing a Democratically controlled Congress. With approval ratings according to a Washington Post-ABC poll at 33 percent, Bush may have little political clout to call for any grand sweeping changes. The dollar is also falling as a result of the jump in oil prices. Oil is trading higher after the U.S. Energy Department announced plans to double the US' emergency oil reserve to 1.5 billion barrels by 2027. Beginning this Spring, this would involve a demand of 100,000 barrels a day. This announcement may just have what it takes to cement the bottom for oil prices. Meanwhile the leading indicators report which was originally scheduled for release yesterday came out firmer than expected. Improvements in the labor market and jobless claims helped the index rebound to 0.3 percent in the month of December from a flat reading the prior month. Any optimism from the report however was offset by a drop in the Richmond Fed manufacturing index. Aside from the weekly mortgage applications and oil inventories report, there is nothing on the US calendar. Unless we have a big surprise from the President tonight, we will probably see more mixed price action in the US dollar.

Euro
After consolidating for close to two weeks, the Euro finally broke out to the upside against the US dollar. ECB talk is spurring the currency's extension as it confirms the central bank's plans to raise interest rates plans again in March. In probably the most direct comment that we have heard from the ECB thus far, monetary policy committee member Bini-Smaghi said today that not raising interest rates would mean "feeding excess liquidity growth," which the ECB does not want. The economic data released this morning also contributed to the Euro's strength. French consumer spending quadrupled market expectations by increasing 1.3 percent in the month of December. This strength suggests that we may see a turnaround in France, who has been the primary laggard in the Eurozone. New industrial orders for the region as a whole also increased strongly by 1.4 percent, but that rise represents a bounce back after 2 months of weakness. The Eurozone economic calendar is empty until Thursday, when the German IFO report is due for release.

British Pound
Even though the British pound is up against the US dollar on the day, a quick look at the intraday chart will reveal that the currency actually weakened significantly throughout the US trading session, having retraced nearly all of its London session gains. Although the US dollar did rebound intraday across the board, the pound's exaggerated weakness was caused by the not so bullish comments from Bank of England Governor King. Going into the release of the BoE minutes tomorrow, traders have been looking for confirmation that interest rates will be raised again in February or March. However instead of giving the market this confirmation, King said that their early response to inflation risks means that they will not need to raise rates as high in the future as they would have if they delayed the rate hike. He also moderated the outlook for inflation by saying that even though inflation expectations have increased, rising work supply has helped to tame wage growth.