Dollar spent most of the night on either side of the 1.5500 level against the euro
[B]Talking Points
• Japanese Yen: Q1 GDP better but yen has no reaction
• Euro: French CPI hotter than expected
• Pound: Clipped by weak employment data
• Canadian Dollar: Capacity Utilization on tap
• US Dollar: Beige Book key event risk today[/B]
[B]Dollar spent most of the night on either side of the 1.5500 level against the euro as it consolidated its gains after recording its biggest two day rally in nearly 3 years. On a night when the European economic calendar offered only French CPI data, trading flows alternated between bargain hunters buying euros below the 1.5500 figure and euro shorts selling any rally above that level looking to push the pair closer to the 1.5000 zone.
1.5500 has been the key measure of balance over the past several weeks of volatility and continues to be one tonight as currency traders grapple with the question of whether ECB will actually follow through on its promise to hike rates in the near future. Higher energy costs have no doubt elevated inflation reading throughout the region, strengthening the central bank’s hawkish resolve. However, economic conditions in southern Europe are far more fragile than up North and any further tightening of credit may tip those countries into a recession. Little surprise then that today’s Wall Street Journal reports on Spanish, Portuguese and Italian worries about a possible ECB rate hike next month while Juergen Stark’s denies to Bloomberg that the ECB has signaled it will raise interest rates again.
No doubt ECB officials would like to keep their policy options open but we believe that they will abstain for at least another month to determine if the recent spike in oil prices is sustainable or not. If oil recedes off its recent record highs the ECB board members will most probably keep rates at 4%.
Cable meanwhile was clipped after the release of worse than expected labor market data as claimant count rose to 9.0K, unemployment rate ticked up to 5.3% and wages rose at 3.8% versus 4.1% forecast. Overall the UK employment data painted a clear picture of a stagnating economy that appears to be vulnerable to further slowdown.
Under such conditions its is difficult to imagine the BOE actually raisings rates, despite strong inflationary pressures from rising fuel and food prices. With PM Brown’s Labor government already sinking in the polls, more rate hikes are likely evoke a massive wave of protest from the British public. Therefore at best UK monetary authorities will attempt to keep rates steady as a countermeasure to inflationary pressures, but if economic conditions deteriorate further the pressure on Mr. King and company to ease will become palpable.
Sterling recovered almost all of its pre-release losses after bargain hunters below 1.9500 level swooped in the aftermath of the news. However, the unit remains vulnerable on the crosses and could weaken even more if upcoming consumer data proves disappointing as well.
In the North American session today the key event will be Fed’s Beige book which will give traders a read on current conditions across the US economy. Any serious signs of slowdown will undermine Dr. Bernanke’s comments last night and could put further pressure on the dollar as the day wears on.
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