Philadelphia Survey Leads Dollar Afternoon Pullback (page 1 of 2)

US Dollar

Another summer day, another relatively dull session during the North American hours. Losing earlier in the morning on a handful of tepid economic reports, the US single currency fought back, in some degree, to capture lost ground in the afternoon. Leading the greenback lower at the open was a lower than expected leading economic indicators report.

Expected to rise on seemingly positive fundamentals, the survey actually declined 0.1 percent on the month. Given the recent spat of data, the survey results were to be expected as the report stands as a simple sum of pre-released data. However, what was surprising and ultimately responsible for the day's positive pullback was a more than positive Philadelphia Fed manufacturing report.

Expected to rise only slightly above the 6 print seen in the previous survey, the August figure was far better than any dollar bull could have expected. According to the Federal Reserve Bank of Philadelphia, the region's manufacturing sector had expanded to the tune of an 18.5 as new orders and shipment components notably improved over the 30-day period. Even more optimistic, sector sentiment remains buoyed as manufacturers remained increasingly confident in the near term.

Expectations are for new orders to remain underpinned along with a pickup in production. The news sent US bonds lower on the day, breaking three solid sessions of gains and sparked sentiment of near term possibility of one more rate hike towards year end. However, the momentum may be lost in the near term as we head into the end of the week. Truth be told, with data being overall tepid at best recently for the US, there will be more needed than a flash in the pan to push Federal Reserve policy makers in hiking one more time.

Euro

Euro data was thin with a lot of traders focusing on the consumer price index survey for the month. Disappointing some, the report results didn't stop euro bullishness from creeping in as the currency major was lifted from the 1.2700 support figure to reach the session high, well above the 1.2850.

According to the overnight report, consumer prices actually declined in the monthly comparison by 0.1 percent with the consensus figuring in unchanged levels for the month. As a result, the annualized figure dropped to a 2.4 percent clip, still well above the European Central Bank's target benchmark. The continued heightening of inflationary pressures is likely to force ECB President Jean Claude Trichet in considering further tightening in the region's benchmark interest rate.

Already pricing in at least two more decisions to the upside, futures traders are banking on such a scenario. However, the only caveat seems to be the effects on consumer consumption. With higher and higher interest rates, consumers are less likely to spend and contribute to a healthy economy. Couple this with new legislation to increase taxes at the individual level and still high rates of unemployment, Trichet may be counterproductive in his hawkish stance.

Nonetheless, the interest rate picture still remains high in the near term and may offer a better alternative than declining dollar fundamentals, keeping the Euro bid at least in the near term.

British Pound

Of all the majors to take a hit on the day, the pound sterling was definitely not one markets saw coming. Just in the beginning of the week, participants were pricing in another round of rate hikes by year end as inflationary pressures continue to loom over the UK economy.