SNB Leaves Interest Rates Unchanged, EU Worried About Inflation (page 1 of 2)

DailyFX Fundamentals 06-19-08

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar: Unfazed by Mixed Economic Data

Despite mixed economic data, the US dollar strengthened against both the Euro and Japanese Yen. The Philadelphia Fed index was unambiguously weak but leading indicators beat expectations. The manufacturing sector is supposed to be the single biggest beneficiary of dollar weakness but unfortunately that has not been the case. The slowdown in global growth and the worst housing market slump in more than 15 years have hurt production in the Philadelphia and New York regions. Unless there is a big jump in activity in the Chicago region, manufacturing is expected to contract nationally. The Philly Fed number really underscores the difficulties facing the US economy, which is slow growth and high inflation. Even though the activity index fell from -10 to -17.1, the input price component jumped to 69.3, the highest level in 28 years. Jobless claims were worst than the market, but they improved from the prior month, suggesting that the labor market has not worsened. There will be no major economic data until the FOMC rate decision on Tuesday. An interest rate hike is not expected, but the Fed will need to increase their degree of hawkishness if they plan on raising interest rates in the fall. The exact timing of the rate hike is still up in the air. Fed fund futures are pricing in a 99.9 percent chance of quarter point rate hike in Sept and an 89 percent chance that interest rates will be at 2.50 percent by the end of the year (Have Forecasts for Fed Rate Hikes Gone Too Far?). Of course, we have seen these expectations for interest rates change on a dime and they will change again with 3 non-farm payroll reports and multiple inflation reports before the September meeting. For the time being, traders buying dollars need to be selective. Although the greenback has strengthened against the Japanese Yen and Euro, it has weakened against the British pound and the currencies of the commodity producing countries.

SNB Leaves Interest Rates Unchanged, EU Worried About Inflation

The Swiss National Bank left interest rates unchanged at 2.75 percent, which was right in line with the market's expectations. Although the central bank said that they would "remain vigilant," they also lowered their 2010 growth forecasts and warned that activity could continue to slow. On inflation, they are just as worried as everyone else, which is why they hiked their 2009 inflation forecast from 1.4 to 1.7 percent. However they felt that the rise in inflation was "transitory" in nature, which the market perceived as dovish, triggering a broad based sell-off in the Swiss franc. This offset any bullishness that would have come from the stronger than expected trade balance report and took CHF/JPY well off its 17 year highs. Meanwhile the Euro also came under selling pressure despite the lack of any meaningful economic data. Eurogroup Junker echoed the same concerns about inflation as the ECB, but with the FOMC meeting next Tuesday, the comments failed to have a meaningful reaction on the Euro.

British Pound Soars as Consumer Spending Growth Hits Record Levels

Based upon the degree of retail sales growth in the month of May, the Bank of England should have nothing to worry about. Consumer spending grew by 3.5 percent, the largest rise on record, driving the British pound higher against all of the major currency pairs. Despite rising gasoline prices and falling house prices, the unseasonably warm weather last month drove robust demand for food and clothing.