The EURUSD rebounded for 50 points rising as high as 1.5579 in early European trade
[B]Talking Points
• Japanese Yen: makes another run above 108.00 on carry flows but stalls
• Euro: Carry, French data help in the recovery
• British Pound: House lending continues to contract
• US Dollar: Consumer Confidence on Tap[/B]
Euro Rebounds But Remains Capped – Will US Consumer Crumble?
The EURUSD rebounded for 50 points rising as high as 1.5579 in early European trade, buoyed by better than expected French data and some bargain hunting at the 1.5500 level. French consumer spending rose by 2.0% in May after falling by 0.9% in April. Business sentiment also held up surprisingly well with French Production Outlook Indicator printing at 7 versus 5 expected.
The better that forecast results from EZ 2nd largest economy provide some support for ECB’s view that growth in the region remains stable and therefore the 15 member union can absorb yet another rate hike sometime this summer. Other data tonight however, cast doubt on this rosy scenario as German GFK Consumer confidence dropped to 3.9 from 4.6 – the lowest reading in two years. Note that only two months ago the GFK survey stood at 5.3 indicating that consumer attitudes have deteriorated dramatically in a very short period of time. No doubt gasoline prices are responsible for the bulk of the pessimism with petrol in Germany now selling for approximately $11.30 per gallon – the highest in the industrialized world.
The deadly combination of high energy costs and restrictive monetary policy may well tip the EZ into a recession in the next several quarters, but for now the currency market is focused strictly on yield and carry trade flows continue to support the euro. In overnight trade EURJPY rose to within striking distance of its all time high of 169.06 from July 2007 and could make a run fro that level if the market becomes convinced that the ECB rate hike will be forthcoming in July.
Meanwhile in US the market will get a glimpse of the Consumer Confidence reading at 1400 GMT with most analysts expecting a further deterioration in the data. The greenback may come under further assault if the number misses to downside suggesting that consumption in US could contract even more as the summer progresses. It is becoming increasingly more difficult for US consumers to make ends meet at the end of each month as gasoline costs have skyrocketed to approximately $100/week for those drivers who own SUVs. Gasoline which is a relatively inelastic good has no doubt crowded out spending on other goods and services and should prices at the pump remain sticky above $4.50/gallon the dynamic bodes ill for the future of US consumer demand.
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