Will Consumer Spending Crush the US Dollar? (page 1 of 2)

DailyFX Fundamentals 03-12-08

By Kathy Lien, Chief Strategist of DailyFX.com

Euro Breaks 1.55, Where Is it Headed Next?

What makes today's record breaking day in the EUR/USD particularly unique is the fact that the currency pair is now trading above the psychologically important 1.55 level. Data wise, its been a quiet day in the currency market, but comments from European officials, the continual rise in oil prices, a drop in US credit spending and widening credit spreads have all contributed to the Euro's rise. At the ECB's meeting with the Gulf Cooperation Council today, Trichet was asked whether the Euro's move was brutal. He repeated that he was concerned about excessive moves on the exchange rate, but at the same time, he warned that it is "very important" for the ECB to continue to "inspire confidence by solidly anchoring inflation expectations." Once again, inflation is the central bank's top focus and they will not be willing to compromise their priority. In other words, do not expect the ECB to stop the Euro's rise anytime soon and for this reason, we could easily see a move above 1.56, which is the wave 5 objective of our technical analyst Jamie Saettele. From a fundamental perspective, Eurozone economic data continues to surprise to the upside. This morning, we learned that Eurozone industrial production rose 0.9 percent in the month of January. French current account, non-farm payrolls and Italian consumer prices are due for release tomorrow along with the ECB monthly report. These numbers are generally not market moving but the US retail sales report will have a big impact on the EUR/USD. If consumer spending is weak, like we expect, 1.57 could be an achievable target. Meanwhile the Swiss National Bank has an interest rate announcement scheduled for tomorrow. The earliest that they are expected to cut interest rates is in the fourth quarter.

Will Consumer Spending Crush the US Dollar?

The US dollar fell to a record low against the Euro today and is within pips of closing in on its 8 year low against the Japanese Yen. The latest move in the currency and bond markets suggest that traders are suspicious of whether the Fed's action yesterday will have a lasting impact on the financial markets. Rate cut expectations have also rebounded with the market now pricing in a 74 percent chance of a 75bp rate cut next week, up from a 62 percent chance yesterday. How much the Fed actually eases will be largely dependent upon tomorrow's retail sales report. With US corporations cutting jobs two months in a row and foreclosures rising, consumer spending will certainly suffer. According to MasterCard's data, spending In the month of February dropped 1.1 percent, their largest decline in 5 years, when they first started tracking the data. However, the absolute value of retail sales could increase because gasoline and food prices are on the rise. It is therefore important that traders watch not only the headline numbers, but also the details of the consumer spending report. Don't forget that import prices will be released at the same time as retail sales. Prices are expected to rise but it should only have a limited impact on the US dollar. The bigger market mover is undoubtedly the retail sales report. Meanwhile, at the Gulf Cooperation Council, Qatar confirmed that they will be keeping their US dollar peg while the Saudi Monetary Authority called the US dollar a good buy. An article in the Wall Street Journal today talks about the degree of Middle Eastern investment into the US real estate market.