By DailyFX - Dollar Rally Stalls Ahead of Trade Data,Rate Debate Continues in UK,Yen Holds onto Losses on Falling Confidence - US Dollar After three...

... consecutive days of gains, we primarily saw profit taking in the dollartoday ahead of what will probably be the two most exciting days in the currency market this week.


With an empty economic calendar today, the market had banked its
hopes on Fed speak, and even though Greenspan's words shook yields up a bit, it did
little for the US dollar. Both Greenspan and Fed President Bies continued to warn
about "speculative excesses" in the market but none of this is really a dramatic
shift in stance for a committee that has been hawkish since June 2004. Between
tomorrow and Friday, there are a lot of very important US data scheduled for release
with the US trade deficit taking center stage first. The market expects the deficit
to widen from -$57.9B to -$59.5B in August, just shy of the -$60.2B low hit back in
February. With oil prices hitting all time highs and up 17 percent in the month of
August, the risk is for a larger than expected deficit. At bare minimum petroleum
imports should be higher than the previous month, but judging from the trend in port
shipments, imports from China have also been picking up at a briskly pace. Taking a
look at the country's own monthly trade report, their surplus was over $10B in
August, up from $7.5B in September. Growing demand for Chinese imports and higher
energy prices could push the deficit to a new record high, which if it is the case
could push the EUR/USD back towards 1.2150. More realistically though, any gains
off of a weaker number could be limited as the market remains hesitant ahead of
Friday's consumer prices, retail sales and industrial production numbers.

Euro
Today's rally did little to help clear the thousand-ton weight hanging over the euro
at this point. Germany's harmonized consumer inflation index was revised down on an
annualized basis from 2.7 percent to 2.6 percent. This still leaves the inflation
rate solidly above the European Central Bank's 2 percent pain threshold, justifying
the central bank President's staunchly hawkish stance. Furthermore, it did not take
long for politics in Germany to come back to the forefront. Even though it has been
agreed that Merkel will be assuming the post as the next Chancellor of Germany next
month, the "grand coalition" is already facing its first stumbling block.
Schroeder's SPD party, which is suppose to stake claim on the majority of the
ministerial positions in the new government are already fighting amongst themselves
about how the seats will actually be allocated within its in own party. If
infighting is already happening within a group that is already use to working
together, it remains to be seen how much infighting will be happening between two
groups that may see each other as arch enemies. Any infighting will diminish the
speed by which the new government can bring reforms to the country.

British Pound
The great rate debate churns on as earnings growth and unemployment data was
released during the session. Rising 4 percent, according to the office of National
Statistics, earnings continue to increase at an easing pace, the lowest rate in
nearly a year and a half. Subsequently, the claimant count remained steady at 2.8
percent, while unemployment change rose for the eighth consecutive month. This
poses further directionless bias in the U.K. economy. On one hand, slowly rising
wage costs may comfort policy makers, as earlier concerns existed over the
contributions to overall inflationary pressures in a tight labor market. However,
on the other, unemployment is rising in the region, especially as the manufacturing
sector has shed about a 3 percent difference on the annualized comparison.
Ultimately, what is apparent is that there may be some room for policy makers to
wiggle in an additional rate cut consideration, as inflationary pressures, in line
with earlier comments by Governor Mervyn King, seem to remain temporary. Granted
that energy prices may not abate any time soon given the winter season, inherent
wage cost declines may offer that final push that policy makers need to accommodate
to continually weak demand.

Japanese Yen
Bucking the trend of recently optimistic data in the world's second largest economy,
consumer confidence dipped for the second consecutive month in six. According to
the Cabinet Office, consumers weighed down by higher energy prices remained less
optimistic of the near term future, wages and employment conditions. What's notable
is the fact that the drop keeps the reading below the key expansionary 50 level and
can be suggestive of waning consumer demand in the near term. However, countering
the notion have been recent increases in retail sales and household consumption.
Previously a major concern, as both contribute tremendously to overall economic
growth, both factors have increased during their respective months. As a result,
the current confidence reading may be taken with a grain of salt as the report looks
to be lagging overall optimism. Moreover, with both declining surveys taken in
months leading up to the parliamentary elections, the politically intense
environment may have contributed more than current economic factors. With that
said, market participants are now looking to tomorrow's inflationary data in lending
further underlying yen strength. Producer prices, slated for release, should be
reflective of higher energy costs. However, any continued signs of persistent
deflation will add to current indecision in the underlying spot.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
DailyFX
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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