Big Week Ahead Could Cause Sharp Moves in the US Dollar (page 1 of 2)

US Dollar

To the disappointment of many traders, Ben Bernanke kept his mouth closed about the state of the economy and the outlook for monetary policy. This left the market in disarray and caused quite a bit of volatility in what was otherwise another thin trading day. The dollar rallied as traders focused on what Bernanke did not say.

The fact that he kept mum on the recent evidence of a further downturn in the housing market prompted many traders with short dollar positions ahead of the announcement to square up and call it day. Much rest will probably be needed as Monday begins what could very well be an extremely exciting week. Key economic data are being released from nearly every major country.

With trading ranges getting narrower, we could be setting up for a major breakout move. From the US, we are expecting, the minutes from the last FOMC meeting, where the Fed kept interest rates on hold, consumer confidence, personal income, personal spending, Chicago PMI, Factory orders, Non-farm payrolls and ISM. These pieces of data will give us a sneak peak on how well the consumer is holding up and how prevalent inflation pressures are at the moment.

Despite weak economic data earlier this week, the dollar has continued to rally because traders needed to see more evidence that the slowdown in the housing sector is finally affecting the behavior of consumers. Tuesday's consumer confidence release will go a long way in shedding more light on whether retail sales due mid next month will be able to repeat the strong print that it had for the month prior.

According to a recent study that we published, ISM and non-farm payrolls are the two most market moving indicators for the US dollar. The fact that they are both being released together on the last business day before the US Labor Day holiday ensures an active morning.

Even though Bernanke failed to give us more insight on where the Fed current stands, the minutes from the August 8 meeting could reveal how close the members of the FOMC were to raising rates again and whether they left that possibility on the table for later this year. With oil prices not budging by much, we still believe that unless a severe Hurricane hits the Gulf and causes oil prices to skyrocket, the likelihood of another rate hike this year is low.

Euro

After hitting a high of 1.2940 on Monday, the Euro did not have enough momentum to extend the rally above the psychologically important 1.30 level. Preliminary inflation numbers from Germany indicated that consumer prices fell by 0.1 percent this month after climbing 0.4 percent the month prior.

The final number is not due for a few weeks, but today's estimate suggests that inflation pressures are subsiding. With the outlook for growth moderating and the possibility of lower inflation, another interest rate hike by the European Central Bank is still up in the air. Although many of the bankers are on vacation in August, it is important to note that we have yet to hear any new comments since their last monetary policy meeting.

Usually when the ECB is adamant about interest raising rates, they are also very vocal about it. Since we haven't heard from the ECB in close to three weeks, this will make next Thursday's monetary policy meeting extremely important.

The ECB are not expected to raise interest rates so quickly after their last rate hike, but there is a press conference scheduled afterwards and it will be particularly important to pay attention to ECB President Trichet's tone and whether he remains committed to raising rates in September, which is what the market currently expects.