US Dollar Faces Many Risks in the Week Ahead (page 1 of 2)

US Dollar
Throughout the past week, the value of the US dollar was determined almost exclusively by foreign developments. The dollar skyrocketed against the Japanese Yen on carry trade demand and slipped against the Australian, New Zealand and Canadian dollars on rising commodity prices. Against the Euro and British pound, the currency remained virtually unchanged. Even though there was barely any US economic data on the calendar, there was plenty of news that could affect the future direction of the US dollar, the most concrete of which is the potential rise in inflation. Consumer price growth was stronger than expected in the month of January which created a wave of concerns about inflationary pressures. The corresponding rise in oil prices exacerbated that concern as it was the most tangible driver of higher prices in months to come. The potential risk of a major blowup in sub-prime mortgages also sent investors fleeing into safer assets while Iran's defiance of UN demands raised concerns for geopolitical risks. The pressure on the US dollar could continue to grow as we head into the busy data week. We are expecting durable goods, consumer confidence, existing and new home sales, preliminary fourth quarter GDP, Chicago PMI, personal income and manufacturing sector ISM. Aside from Chicago PMI and ISM, the market is not expecting dollar friendly data, especially at the beginning of the week. A drop in aircraft orders should weigh on durable goods orders while softer inventory data and downward revisions to non-residential and business investment could lead to a significant downward revision in GDP. This supports the technical outlook for the majors, which has turned dollar bearish on the last trading day of the week.

Euro
The Euro ended the day higher against the US dollar despite a softer German IFO report. The drop in business confidence from 107.9 to 107 in the month of February was relatively mild and any bearishness was offset by optimism off of the stronger French consumer spending numbers. The prospect of an interest rate hike in March and the potential impact of the Value Added Tax increase have given businesses reason to be slightly less optimistic about current and future conditions. Looking ahead, the Eurozone economic calendar is just as busy as the US calendar which suggests that we could see a meaningful pickup in market volatility. The Eurozone will be releasing German and Eurozone consumer prices, retail and manufacturing PMI, money supply, German and French unemployment, German retail sales and Eurozone consumer confidence. On balance, the data is expected to be Euro positive. Consumer price growth is forecasted to have accelerated in the month of January, the labor market in both France and Germany are expected to have improved along with conditions in the manufacturing sector. The only uncertainty lies in retail sales. Consumer spending was exceptionally strong in the month before the VAT increase and in response to that, spending is expected to have been pared in January. Switzerland will be releasing their KoF leading indicators report and manufacturing sector PMI report.

British Pound
The British pound is stronger against both the US dollar and Euro thanks to underlying strength in the fourth quarter GDP report. Even though the headline GDP number was not revised, private consumption and exports were. In fact, consumer spending was so healthy that it triggered cautious comments from Bank of England member Sentence who said that it was important for the central bank to keep demand under control, especially since inflation is coming back on-track.