Euro: Has Inflation Hurt Businesses? (page 1 of 2)

DailyFX Fundamentals 06-20-08

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar: First oil summit, then Fed meeting

The US dollar faces two major event risks next week - the Oil Summit in Jeddah and the FOMC rate decision.

This weekend, Saudi Arabia will be hosting an Oil Summit in the city of Jeddah, located on the coast of the Red Sea.

They have invited executives from oil companies, leaders of nations and the world's largest oil producers.

Oil is the world's biggest problem and the market is hoping that Saudi Arabia can drive down the price oil.

However this hope may be overly optimistic since the market has failed to respond to Saudi Arabia's prior announcement about increasing production.

With Venezuela, one of the most important members of OPEC absent from meeting, we do not expect any groundbreaking results. Most OPEC nations including Iran do not believe that increasing supply is the solution because their belief is that oil is being primarily driven higher by speculation.

The Saudi Arabia meeting alone will not cause a long term top in oil but how oil trades after the meeting will certainly impact the US dollar.

On Wednesday, the Federal Reserve will be making a monetary policy announcement. After cutting interest rates by 325bp since August, the Fed is expected to pause. With the pause should come hawkish comments that pave the way for an interest rate hike before the end of the year.

The debate in the markets right now is whether a rate hike will come before or after the US Presidential elections in November.

Currently, Fed fund futures are pricing in a strong likelihood of a September rate hike and the tone of the FOMC statement should shed more light on the Fed's urgency to contain inflation.

Hawkish comments will be positive for the US dollar while neutral comments will be very dollar negative. Aside from the FOMC rate decision, consumer confidence, durable goods, new and existing home sales, the final release of first quarter GDP, personal income and personal spending are due for release.

Not only will it be a big week for the US dollar, but the FOMC statement could set the tone for trading for weeks to come.

Euro: Has inflation hurt businesses?

The Euro strengthened against the US dollar as producer prices in Germany grow by the fastest pace in nearly two years.

It is actually a bit surprising that the Euro still responds to stronger inflationary pressures which is nearly a given considering that food and energy prices continue to climb.

ECB member Bini Smagh warned this morning that rates will have to increase because if 'inflation is left to creep up, the cost of bringing it down later will be even higher.'

The focus next week for the Eurozone will be how inflation has impacted growth. The week starts off with the German IFO report, and the service and manufacturing PMI numbers. Then on Friday, we are expecting the retail PMI numbers and current account.

This past week, German investor confidence dropped to a 15 year low. The recent drop in consumer spending as well as the threat of an interest rate hike next month should also weigh on business confidence.

Meanwhile, Switzerland also reported a sharp increase in import prices but apparently that was not enough to convince the Swiss National Bank to raise interest rates. Next week, Switzerland will releasing the UBS consumption index and KoF leading indicators.