Euro Hits Fresh 2 Month Low (page 1 of 2)

DailyFX Fundamentals 06-12-07
By Kathy Lien, Chief Strategist of DailyFX.com

Dollar Rallies, Bond Yields Hit 5 Year High, Stock Market Plummets: What Does It Mean for US Data?

Even though there was no major US economic data released today, we had very volatile price action in the financial markets. The Dow Jones was down 90 points in the first hour of trading then rebounded back to flat before selling off once again to end the day down almost 130 points. Ten year bond yields also hit a 5 year high driving the US dollar up against the Euro and Japanese Yen. In fact, the yield curve is now pricing a slim chance of a rate hike over the next year. The price action in the three markets suggests that the bias is certainly skewed towards stronger numbers tomorrow morning as the US data calendar heats up significantly. We are expecting May retail sales and import prices, April business inventories, the Treasury's report on FX manipulation as well as the Beige Book report. Record gasoline prices in late April, early May could boost gasoline receipts which are reflected in the overall value of retail sales. The weaker dollar on the other hand should drive import prices higher. Inventories are expected to rebound after a drop in March while China will mostly likely avoid being branded a currency manipulator given recent changes to monetary policy. Stronger economic data will only validate the Federal Reserve's need to leave interest rate unchanged which is why the stock market is falling instead of rising. Stocks will need to fall much further before the Fed will consider lowering interest rates however.

Euro Hits Fresh 2 Month Low

The Euro has sold off everyday since last week's ECB meeting. The weakness has been so severe that the currency is now trading at a fresh 2 month low against the US dollar. Broad dollar strength was the primary catalyst for today's move, but we are also seeing holes in European data. In the month of April, industrial production dropped by 0.8 percent with contraction reported by Germany, France and Italy. On top of that, we also saw a slowdown in the growth of wholesale prices, which suggests that inflationary pressures may be abating. Even so, ECB members remain very hawkish and continue to warn of the need for further rate hikes this year. It is this very sentiment that will limit losses in the EUR/USD. The Federal Reserve remains on hold, but the ECB is still looking to raise interest rates. Of course, any further rate hikes are not expected until September at the earliest. In the meantime, there are no major European data due for release tomorrow.

British Pound: UK Economic Data Begins to Strengthen, Leading Currency Higher

The British pound was the only currency that managed to strengthen against the US dollar today. Despite an exchange rate of 2.0 in the month of April, the trade deficit actually narrowed to a 2 year low thanks to an improvement in the oil sector. Inflation numbers were also stronger than expected as the annualized growth of core prices increased from 1.8 to 1.9 percent in the month of May. Both of these numbers illustrate the UK economy's resilience to a strong currency. The same is expected in tomorrow's labor market figures. Strength in the employment component of both the service and manufacturing ISM reports suggest that we could see a continual drop in jobless claims. A better economic outlook is one of the primary reasons why Bank of England Governor King was so hawkish yesterday evening. His concern for inflation is a clear sign that the central bank plans on increasing interest rates again.