The G-8 meeting concluded over the week-end without making any overt references to support the dollar in its communiqué and as a result the buck opened weaker at the start of trade on Monday.
[B]Talking Points
• Japanese Yen: Runs above 108.50 as Nikkei rallies +380
• Euro: Back above 1.5400 after G-8 makes no comment on FX
• Pound: Runs to 1.9550 on overall dollar weakness
• US Dollar: Empire on tap
[/B]
Dollar Uncertain After G-8 – Where to Next?
The G-8 meeting concluded over the week-end without making any overt references to support the dollar in its communiqué and as a result the buck opened weaker at the start of trade on Monday. The EURUSD popped up above 1.5400 on a small gap open in Asia, drifted lower to 1.5345 and then regained its footing trading well above 1.5400 by mid morning of the European session.
The pair is being pushed and pulled in opposite directions as the relief from lack of any apparent G-8 intervention on the behalf of the dollar is offset by the lingering concerns over Ireland’s rejection of the European constitution on Friday. As we noted in our weekly, quoting our colleague Kathy Lien, “As the European Union’s second attempt at a constitutional treaty, in some ways it deals a significant blow to the EU but in some ways, it does not. Recall what happened in 2005 when the French and the Dutch rejected the proposed EU Constitution Treaty. The Euro weakened, there was a lot of panic and fear about the viability of the single currency but eventually, the Euro erased all of its gains and then some when traders realized that the single currency is here to stay. The same can be said this time around. The EU Constitution is at risk and not the European Monetary Union.“
Thus, the FX impact of the Irish “no” vote is likely to be limited and trading focus this week should once again return to economic data. To that end, today’ s EZ CPI numbers sent a mixed message as well with core printing slightly below expectations at 1.7% versus 1.8% while headline numbers rose to 3.7% versus 3.6% forecast. The report therefore provided few clues as to possible ECB action next month as it offered valid arguments for both keeping rates steady and hiking them.
Nevertheless, given the increasing political tension within the EZ we remain highly skeptical that ECB will actually make good on its promise to hike rates further. Yet, since monetary authorities in the region do not face direct political accountability they may ignore the cries of protest from the union’s southern members and choose to err on the side of price stability. The key factor in ECB’s decision making process will be the price of oil. Given the fact that headline pressures are almost exclusively driven by energy costs (which in turn increase food and other costs in the system), if price of oil drops to below $130/bbl the ECB may choose to pass. Therefore, the most important variable driving trade in FX this week may not come from the economic calendar but from the pits of NYMEX.
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