US Dollar Fails to Gain on Stock Weakness, Pressured by Fed Forecasts (Euro Open)

The US Dollar consolidated at lower levels in the overnight session, failing to capitalize on falling stock prices across Asian exchanges as the minutes from the last Fed policy meeting continued to weigh on the exchange rate. Japan’s service demand fell to the lowest since 1995 while Australian consumers expected lower inflation in May. UK Retail Sales are on tap in European hours.

[U][B]Key Overnight Developments[/B][/U]

[B]• Japan’s Service Demand Falls to the Lowest Level Since 1995
• Australian Inflation Expectations Show Weakness in Consumer Sentiment
• US Dollar Fails to Gain on Stock Weakness, Consolidates at Lower Levels[/B]

[U][B]Critical Levels[/B][/U]

The [B]Euro[/B] consolidated gains in overnight trading, oscillating in a 50-pip range below the 1.38 level. The [B]British Pound[/B] followed suit, trading sideways in a 70-pip band below 1.58. The [B]US Dollar[/B] failed to capitalize on losses across Asian stock exchanges, with the typically safety-linked currency weighed down by the Fed’s revised growth forecasts and prospects of expanded quantitative easing.

[U][B]Asia Session Highlights[/B][/U]

Japan’s [B]Tertiary Industry [/B]Index fell much more than economists expected in March, tumbling -4.0% versus expectations of a -1.5% result. Service demand dropped by a hefty -9.16% from a year earlier, printing at the lowest level in 14 years. The metric follows how much households and businesses spend on such things as utilities, health care, and financial services. The jobless rate has surged to the highest in nearly five years, trimming disposable incomes and encouraging precautionary saving to weigh on spending. Private consumption accounts for over 58% of total output, pointing to continued weakness in overall growth in the months ahead after the economy shrank by a record 4.0% in the first quarter.

Australia’s survey of [B]Consumer Inflation Expectations[/B] saw the headline figure slip to 2.3% in May from 2.4% in the previous month, the second-lowest reading since the metric set a record low at 2.2% in March. Looking at the details, 57.5% of survey respondents expect prices will go up, the most in 6 months. Curiously, hourly wage growth expectations continued lower, with respondents saying those will increase at a pace of 3.9%, down from 4.7% in the preceding month. Extrapolating the likely mentality of Australian consumers as reflected in the data, it is reasonable to suppose that they are likely to buy what they need now, expecting prices to be higher and the wage climate less favorable in the future. This bolsters the negative view of long-term consumer sentiment that we noticed in analyzing March retail sales figures, wherein we saw that the way consumers were spending the government’s fiscal package suggested it was seen as a one-off income boost, hinting at expectations of lower spending power in the months ahead.

Euro Session: What to Expect[/B][/U]

[B]UK Retail Sales[/B] are expected to rise 2.4% in the year to April, the second consecutive month that sales growth accelerated after setting a record low at 0.4% in February. The improvement will likely come as the government’s spending boost begins to work its way into the broad economy. Still, the metric has been trending firmly downward since May of last year and the expected upswing will hardly amount to a break from that trajectory. Looking ahead, retail activity is likely to remain subdued: the unemployment rate has ticked up to 4.7% in April, the highest in over 11 years, and is expected to top 9% by the beginning of next year, shrinking disposable incomes to put substantial pressure on spending. Indeed, [B]Business Investment[/B] is set to fall -4.0% in the first quarter to bring the annual pace of decline to -5.9% from -4.5% in the three months to December 2008 as companies scale back capacity amid dwindling domestic and overseas demand. Household spending accounts for 63% of overall economic growth, hinting that the UK will continue to underperform for some time yet.

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