Big Week Ahead Could Cause Sharp Moves in the US Dollar, Keep an Eye on ECB Press Conference Next Week, EUR/JPY Closes Just a Hair Shy of Record Highs
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.
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.
The British pound ended the day flat against both the Euro and the US dollar. Preliminary second quarter GDP figures were right in line with expectations, rising by 0.8 percent on a quarterly basis and 2.6 percent on an annualized basis.
This represents acceleration from the 0.7 percent quarterly and 2.3 percent annualized growth that we saw in the first quarter. The components of the report were mixed with private consumption and government spending increasing more than expected but imports and exports both fell short of expectations.
There is little more to garner from this report and UK markets are closed on Monday for the Summer Bank Holiday. There is no significant UK data due until Thursday which means that like this week, the pound will probably continue to driven by dollar based news – which there will be plenty of.
The Japanese Yen sold off across the board today with EUR/JPY closing just shy of the record high that it hit today. The combination of disappointing consumer price numbers, the fear that the tropical depression could become a major storm in the Caribbean and overall dollar bullishness has put major pressure on the Japanese yen.
Traders were banking for a strong CPI report to give the Bank of Japan a reason to raise interest rates sooner rather than later. Unfortunately the 0.1 percent drop in national prices and the flat core rating for the month of July reduced that possibility. Part of the drop however was due to the change in methodology of calculating the CPI.
Under the old calculation methods, core prices would have printed up 0.6 percent compared to an unchanged reading. The week ahead brings more important data that could alter the outlook for the yen. This includes reports on the labor market, consumer spending, housing starts and industrial production.