Another night of back and forth price action as EURUSD continued to swing on either side of the 1.5500 figure which has become the literal and figurative level of equilibrium in the pair.
Talking Points
• Japanese Yen: Breaks back below 108.00 as US rate expectations pared
• Euro: Flies to 1.5550 only to drop below 1.5500 after weak ZEW
• Pound: Headline inflation prints hotter King must write a letter but pound killed on Asian selling
• Canadian Dollar: International Transactions key event risk
• US Dollar: PPI on tap
Dollar Holds Ground- Is Inflation Illusory?
Another night of back and forth price action as EURUSD continued to swing on either side of the 1.5500 figure which has become the literal and figurative level of equilibrium in the pair. The directionless price action is a reflection of the general confusion in the currency market as traders try ascertaining the true intentions of President Trichet and Chairman Bernanke.
While the two men have made unambiguously hawkish comments over the past two weeks raising the possibility of higher rates on both sides of the Atlantic it very much remains to be seen whether they will be able to follow through on their rhetoric. Inflation is clearly the primary problem vexing all of the G-11 central bankers, however a closer looks at the numbers reveals that almost all of the price pressure emanates from oil.
Today’s UK CPI numbers are a perfect case in point, as headline reading printed hotter than expected at 3.3% vs. 3.2% forecast but core remained well contained at 1.5%. This same dynamic occurred yesterday in the EZ numbers as well. In short the world over headline readings may be hot but they are being driven there not by overheated demand but rather by skyrocketing energy costs which have impacted virtually every product and some services in the economic chain.
Monetary authorities are becoming increasingly worried about the rise in inflation expectations, most specifically the unleashing of wage-price spirals that dogged the US economy in the late 1970’s and early 1980’s. However with unemployment rising in the US and no longer declining in Europe the danger of runaway wage increases appears minimal. On the other hand the risk of tipping both economies into a recession through unnecessarily restrictive monetary policies is quite real.
Today’s ZEW numbers which printed far worse than forecast at –52.4 from -41.4 are a sign that investors in region are becoming considerably more gloomy about future prospects for growth. With credit on EZ already curtailed sharply, any additional rate hike by the ECB could prove fatal to growth prospects in the region in the second half of Q2.
Meanwhile in US the calendar brings the PPI data which is likely to follow the same pattern (hotter headline and muted core readings) as well as Housing Starts data. As we noted yesterday the most important variable driving trade in FX this week may not come from the economic calendar but from the pits of NYMEX. If oil drops below $130/bbl in today’s trade the greenback could see a further boost.
EURUSD 1.60 or 1.50? Join us in EURUSD Forum
