By DailyFX - US Dollar. The foreign exchange market has been extremely quiet today with most currency pairs aside from the Canadian dollar calmly consolidating....

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The next few days will be very
busy as traders prepare themselves for a long list of key economic data scheduled
for release from all of the major countries around the world as well as a number of
Fed speeches. Bernanke’s credibility has really come to question over the past few
days and will be tested even more so this week. Financial editors of the press have
had a blast touting his keen ability to confuse the markets which comes in clear
contrast to the transparency, clarity and simplicity that he initially promised when
he became Federal Reserve Chairman. He is slated to speak this evening and then
once again in the morning and in all likelihood, he will stick to the script on Bank
Supervision because he knows that if he fails to affirm his newly hawkish stance,
all credibility would probably be lost. Given earlier signs of slower growth, this
week’s data, starting with tomorrow’s retail sales report could potentially surprise
to the downside. If retail sales do come out extremely weak, the market will wonder
whether Bernanke is playing with fire, risking a global slowdown to combat
inflation. Of the other Fed officials that spoke today, they either refrained from
mentioning monetary policy or simply repeated their concerns with inflation.
Whether inflation is really prevalent will also be proved this week as we first see
the producer price index tomorrow morning and then the consumer price index on
Wednesday. These will be watched even more closely than they usually are because if
neither confirms the strong inflation concerns of the Fed, Bernanke’s credibility
will be in question once again, which would be negative for the US dollar. The only
piece of economic data that was released today was the US’ monthly budget statement,
which reported a larger deficit of -$42.8 billion compared to a -$35.4 billion
forecast. Structural problems have been plaguing the US economy for years and based
upon the latest figures, it is far from being resolved. Meanwhile the hurricane
season begins with warnings that the season’s first Tropical Storm Alberto could be
named a hurricane. With oil prices still hovering above $70 a barrel, if any
hurricanes this summer hit the US oil and gas heartland along the Gulf Coast, we
could easily see another record high in crude, which could pose another risk to the
sustainability of consumer spending. If the US consumer goes, so does the US
dollar. However as long as the US consumer holds on, the Fed will be able to as
well, which would validate and exacerbate the greenback’s recent climb * so keep an
eye on weather patterns as well as retail sales.

Euro
The Euro has now seen its longest stretch of weakness against the US dollar since
November. Of the little economic data released this morning, neither was
particularly market moving. German wholesale prices increased a more than expected
0.7 percent in the month of May while Italian industrial production fell by a more
than expected 1.0 percent. The real market movers will start to be released
tomorrow beginning with the German consumer price index and the ZEW survey of
economic sentiment. Although the strong value of the Euro throughout the month of
May and into early June poses a big risk to how analysts perceive the future health
of the German and Eurozone economies, it is important to note that the survey was
closed today, indicating that many analysts could have made revisions to their
forecast while some could have waited to submit it until the last minute, which
would have given them the opportunity to account for the deep 400 pip slide that we
have recently seen in the Euro. If this is the case, then the ZEW survey could
actually not be as bad as the market’s current predictions. Ultimately however, the
ECB raised interest rates last week and is at no urgency to do so again which means
that the primary focus and catalyst for market volatility will be the Federal
Reserve and US data, at least for the next two or three weeks.

British Pound
After five consecutive trading sessions of weakness against the US dollar, the
British pound has finally seen a green day, albeit a mild one as the currency
rallies against both the dollar and the Euro. A lot of the British pound’s
pessimism against the Euro was built up in anticipation of a strongly aggressive
European Central bank, to the degree that it would come in stark contrast to the
Bank of England’s solidly neutral stance. However, the ECB was not as hawkish as
the market had hoped last week, which forced Euro bulls to reconsider their
positioning. Producer prices came out weaker than expected in the month of May,
with import prices falling by 0.5 percent while output prices rose by 0.3 percent.
Even though producers are passing on more costs, inflation is not an immediate
concern for the central bank. Instead, the pound is taking a bit of comfort in the
fact that house prices accelerated by a faster pace in the month of April according
to the Office of the Deputy Prime Minister. Although encouraging, it has little
impact on changing the minds of the country’s policy makers.

Japanese Yen
The Japanese Yen is weaker against most of the majors today as consumer confidence
took a surprisingly tumble from 50.2 to 49.9 in the month of May. Even though this
is slightly below the 50 pessimism / optimism mark, the index still remains near a
15 year high. Other data was more encouraging with first quarter GDP revised to the
upside from an annualized pace of 1.9 percent to a whopping 3.1 percent. Corporate
goods prices were also stronger, rising by 3.3 percent, compared to a forecast of
2.8 percent. With economic growth solid and inflation increasing, the landscape
continues to provide a more conducive environment for an interest rate hike.
However any positive news will do little than give the Yen a short term boost since
the Bank of Japan is in no rush to raise interest rates. The central bank’s
monetary policy decision is June 15th, although Governor Fukui’s comments will
receive some attention, the actual interest rate decision will probably not.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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