Dollar Rebounds on Hawkish Comments from Fed Presidents (page 1 of 2)

US Dollar

The combination of weak European economic data and hawkish comments from the Federal Reserve has helped the US dollar regain strength after the EUR/USD's attempt to close above 1.29. The 1.29 to 1.2950 zone has been stiff resistance for the currency since May and judging from the price action over the past two days, it continues to be.

The US economic calendar this week is relatively light until Thursday, but this did not stop surprisingly hawkish comments from Federal Reserve Presidents Guynn and Moskow from moving the US dollar. Both Guynn and Moskow raised concerns about the risk of accelerating price pressures and indicated that the central bank may need to raise rates again in the future to keep inflation in check.

However, with Guynn leaving the Federal Reserve soon and Moskow a non-voter this year, they do not have much power to sway the FOMC. Yet, with the dollar's weakness becoming exhausted, traders were eager to look for a reason to take profits on dollar shorts and their comments fit the bill.

There is still a less than 30 percent chance that the Federal Reserve will raise rates again over the next few meetings especially as oil prices stabilize around $72 a barrel. Looking ahead, the 1.2750-1.2950 range in the EUR/USD should continue to hold for the remainder of the week. Summer holidays in Europe and Japan have kept trading extremely thin.

Euro

The Euro tanked after a dose of disappointing economic data today. The German ZEW survey of analyst confidence fell from 15.1 to -5.6, a complete collapse that caught the market by surprise. The consensus forecast was for only a mild drop to 11.4, but instead confidence slipped to the lowest level since 2001.

The ZEW survey for the Eurozone also fell from 18.1 to 1.3. Analysts felt that the current conditions were better than the market expected, but they were extremely pessimistic about future conditions and there is no surprise why. We have long said that as the World Cup effect fades, reality will set in and the Eurozone will be forced to look internally for growth.

The combination of tensions in the Middle East, increased terror alert levels at airports around the world, a strong Euro and political turmoil in Germany makes the future extremely murky. Domestic demand has always been lackluster in the Eurozone and the latest risks do not make it any easier for Europeans to part with their hard earned cash. However, the ZEW survey has recently had a weak correlation with the German IFO survey of business confidence.

The IFO survey is a more reliable barometer of how the economy is doing or how businesses are actually feeling rather than how analysts perceive the outlook for local businesses. Therefore, although the ZEW suggests that the IFO will also be weak this month, the decline may not be as sharp as the 20 point drop that we saw today.

Meanwhile French GDP increased a less than expected 1.1 percent in the second quarter while new orders in the Eurozone dropped by a more than expected 2.5 percent in the month of June. The impressive growth that we saw in the second quarter is beginning to fade and the high level of the Euro is certainly not helping.

This suggests that European Central Bank will most likely forgo an interest rate hike at the end of the month and wait until September to see if the economy improves before raising rates again.

British Pound

The lack of any UK economic data over the past two trading days has forced the British pound back to the familiar - which is to have its valuation determined by the movements of the Euro and the US dollar.