By DailyFX – US Dollar Earlier gains in the US dollar were reversed as the market questioned the sustainability of the stronger economic reports. … …

Soaring oil prices seemed to have little impact on the sentiment of consumers as their confidence hit 4 year highs.
The market was expecting confidence to dip from 107.2 to 106.2, but instead it
jumped from an upwardly revised 107.5 to 109.6 for the month of April. It seems
that the comfort of a booming labor market is offsetting the strain that consumers
may be feeling at the pump, but if pump prices continue to rise, it is only a matter
of time that sentiment also turns sour. Taking a look at the previous rallies that
we have seen in oil over the past year, such as the June to August move and then the
December to January move, it wasn’t until we hit a peak in oil that consumer
confidence began to topple. In both instances confidence saw big jumps before paring
back significantly. Another piece data that came in stronger than expected but its
sustainability remained questionable was the existing home sales report for the
month of March. Existing home sales increased from 6.9 million to 6.92 million.
Although the actual increase was nominal, it was substantial compared to the
market’s forecast for a dip to 6.66 million. The worry is that existing home sales
tends to be a lagging indicator because it reflects sales that were completed in
March. This means that the actual purchase was probably made a month or two before
that. Even though tomorrow’s new home sales report is for a smaller sector of the
overall market, it tends to be seen as a more reliable reflection of how well the
housing market is currently doing because the sales are recorded in the index as
soon as the initial contract is signed. There was a huge drop in new home sales
reported last month which suggests that a rebound is not out of question. However,
if the rebound comes in far higher than the current forecast, then the arguments for
a stabilizing real estate market may be more accurate. Durable goods are also on
tap tomorrow along with the Beige Book report. Market expectations suggest that
both could to be bearish for the dollar. Against some currencies, we have seen an
extension of dollar weakness while for others, today will probably prove to be
nothing more than a mere retracement.

Euro
The Euro is stronger today thanks to mostly positive economic data. To the surprise
of the market, German business confidence shot to a 15 year high in the month of
April. This is also the index’s fifth consecutive monthly rise. Originally
expected to dip, the index instead rose from 105.4 to 105.9. Increases were seen in
both the current assessment and expectation components of the report, reflecting the
economic recovery that is occurring in the Eurozone’s largest economy. Although
some skeptics say this may be the peak in the IFO report, it nevertheless confirms
the need for the central bank to remain hawkish. This is especially true after the
big jump in German consumer prices in the month of April. The annualized rate of
CPI growth increased from 1.8 percent to 2.0 percent with the harmonized rate rising
from 1.9 percent to 2.3 percent. This brings the CPI back to levels that should
raise concerns at the European Central Bank. Last night’s comments from ECB
President Trichet was bullish on growth but he downplayed a May rate hike again by
saying that the ECB needs to remain “extremely cautious” given the “potential
dangers” that high oil and commodity prices can unleash on the global economy. For
the most part, he focused his speech on calling for more appreciation in Asian
currencies in general and not just China. The improved performance of the Eurozone
and the divergence from the pace of growth in the UK continues to benefit the
EUR/GBP cross. Finally, the only damper in today’s basket of data was trade numbers
which came in mixed. Current account for the region widened more than expected but
the trade balance came in narrower.

British Pound
The British pound strengthened against the dollar for the third consecutive day.
CBI industrial orders for the month of April was the only piece of data released
today. The index improved from -16 to -11 in March, which is the highest reading in
the index since Feb 2005. Tomorrow the market will be anticipating the first
quarter GDP. Growth is expected to remain stable at 0.6 percent . The country’s
gradual recovery would be consistent with recent data. Wage growth was also stable
at 3.0 percent. For the time being, unless a new wave of merger and acquisition
news sweeps the UK, the British pound will continue to trade based upon dollar
factors or its relative performance compared to the Eurozone economy.

Japanese Yen
After Monday’s extensive moves, the Japanese Yen gave back a small portion of its
gains against the majors today. In general, over the past few months, moves to the
downside in dollar yen have been far more brutal than moves to upside. The reason
is because the risks for the Yen are more weighted to the downside than the upside.
The only upside factors keeping the yen lifted are higher interest rates in the US
and the Bank of Japan’s zero interest rate policy. However if there was ever to be
a surprise similar to the one this weekend, the possibilities are greater in favor
of the yen than the dollar. The market has been hanging onto the possibility of
either more revaluation from China or a much anticipated move on monetary policy
from the Bank of Japan * both of which would be positive for the yen and negative
for the US dollar.

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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