The EURUSD spent a relatively quiet night of trade consolidating its post FOMC gains around the 1.5650 figure
[B]Talking Points
• Japanese Yen: holds above 108.00 on steady carry demand
• Euro: Consolidates at 1.5650 post FOMC consumer data weighs
• British Pound: 1.9750 caps the rally
• US Dollar: Existing Homes on tap
[/B]
Euro Consolidates Post FOMC; EURJPY- The Flavor of the Day?
The EURUSD spent a relatively quiet night of trade consolidating its post FOMC gains around the 1.5650 figure but forward progress was hurt by a sharp drop in French consumer confidence suggesting that economic conditions across the ocean are not much better than they are in the US. French confidence reached a new low hitting –46 versus –41 expected as rising prices damped spending plans as consumers were less inclined to purchase big ticket items, While French consumers have a history of saying one thing while doing another, (note the surprisingly strong rebound in French consumer spending data just a few days back) the survey does suggest that the parabolic rise in energy prices may have significant negative repercussions on spending in the next several months.
While the EZ consumer, much like his US counterpart is clearly slowing down, it is unlikely that this dynamic will have any effect on ECB monetary policy next month. Tonight’s economic calendar also showed that EZ M3 expanded at faster than expected rate of 10.5% vs. 10.4% forecast no doubt fueling further worries about inflation amongst monetary authorities in Frankfurt while only strengthening their resolve to raise rates in July.
As we noted earlier, the market now shares a near universal belief that EZ rates will increase by 25bp to 4.25% next week. Meanwhile yesterday’s rather ambiguous statement from the Fed still leaves the idea of an increase in September Fed funds rate a matter of serious doubt. In short with the interest rate differential between the euro and the dollar expanding to 225bp the euro will continue to attract speculator flows especially if economic data from the US continues to surprise to the downside further jeopardizing the possibility of tightening by the Fed.
We believe the Fed missed a golden opportunity to support the dollar with a surprise rate hike yesterday leaving the greenback subject to the whims and vagaries of the oil market. If oil prices remain sticky above $130/bbl for much longer, dollar’s value is likely to continue to erode. If on the other hand, oil begins to finally break to the downside, Dr. Bernanke and company would have caught a lucky break as currency traders would assume that the ECB would limit its tightening policy to “one and done” putting no further selling pressure on the greenback.
The one clear winner in FX from yesterday’s decision appear to be carry trades. Overnight EURJPY set a new all time record high at 169.46 and if the equity market environment remains constructive the cross may make a run for the psychologically key 170.00 figure later in the day. Today’s North American session could provide the impetus for the move especially if the economic data produces relatively benign results in jobless claims but shows further weakness in Existing Homes sales keeping US rate hike expectations subdued while allowing the S&P to extend its rally setting the foundation for more EURJPY gains.
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