US Dollar, Japanese Yen Gain as Drop in US Consumer Confidence Hurts Investor Sentime

•US Dollar, Japanese Yen Gain as Drop in US Consumer Confidence Hurts Investor Sentiment
•Euro, British Pound Lag as Data Indicates Economies Far From Recovery
•Swiss Franc Declines As Consumption Sputters, Trade Partners Struggle
•Commodity Currencies Decline On Expectations For Further Global Contraction

US Dollar, Japanese Yen Gain as Drop in US Consumer Confidence Hurts Investor Sentiment
The US dollar and Japanese yen regained a bit of ground on Tuesday as disappointing economic news cooled optimism throughout the financial markets. The Conference Board’s index of US consumer confidence unexpectedly tumbled to a reading of 49.3 during the month of June from 54.8. A breakdown of the report shows deterioration in confidence about both the current situation and expectations for the next six months, as consumers judge that jobs are hard to get, business conditions are worsening, and income prospects are either unchanged or falling. Meanwhile, inflation expectations for the next 12 months rose to 5.9 percent from 5.6 percent, which is in line with what we’ve seen in recent months and is down from 7.7 percent a year ago. All told, it appears that consumers haven’t seen proof of the talk of green shoots in the economy that helped boost sentiment in recent months, and until they see a clear improvement in the labor markets and in business activity, confidence could remain historically low through the end of the year.

On Wednesday, the 10:00 ET release of the ISM Manufacturing index will give another timely view of conditions in the economy. The June reading of the index is anticipated to rise for the fifth straight month to 44.6 from 42.8, but since it remains below 50, this would also mark the seventeenth straight month of contraction in business activity. Other measures of manufacturing sector activity for the month of June have shown slight improvements, offering some upside potential for this report. However, the news may not be very market-moving unless ISM Manufacturing can break above the pivotal 50 mark into expansionary territory. On the other hand, an unexpected decline could trigger risk averse selling of equities and carry trades once again, working to the benefit of safe havens like the US dollar and Japanese yen.

Related Article: US Dollar Weekly Trading Forecast

Euro, British Pound Lag as Data Indicates Economies Far From Recovery
Both the euro and the British pound fell against the US dollar on Tuesday as economic data highlighted how far from recovery the Euro-zone and UK remain. Germany’s Federal Labor Agency said that unemployment levels rose by 31,000 in June to 3.5 million, the highest since 2007, while the jobless rate rose to 8.3 percent from 8.2 percent, suggesting that consumption is likely to fall in the Euro-zone’s biggest economy in coming months. Meanwhile, Eurostat’s initial estimates showed that Euro-zone CPI fell to -0.1 percent in June from a year earlier. While the European Central Bank (ECB) has said in the past that they expect inflation to fall negative mid-year, the actual results may keep concerns alive that deflation is a clear and present risk for the region.

The British pound was hit especially hard on news that the Office for National Statistics revised their UK GDP readings down to -2.4 percent for the first three months of the year, matching the Q3 1979 low. Even worse, the year-over-year rate of GDP growth was revised all the way day to -4.9 percent, which is the lowest since recordkeeping began in 1956. The results leave GDP at the lower end of the Bank of England’s past projections, and suggest that the central bank’s forecasts were perhaps somewhat optimistic. Furthermore, if development continue to turn more dour, the central bank may start considering an expansion of their quantitative easing program.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Swiss Franc Declines As Consumption Sputters, Trade Partners Struggle
The Swiss Franc fell against the US dollar following disappointing economic releases that hurt prospects for a near-term recovery. The most influential to the currency was the UBS consumption indicator, which showed further signs of weakening conditions. While the Swiss National Bank has been trying to stop Swiss franc’s appreciation against the euro in order to prevent deflation, the sharp decline in consumption may be signaling that falling prices may come regardless as demand drops. Meanwhile, the Swiss export industry will likely continue to experience weakness as its major partners remain entangled in their own recessions.

Related Article: Swiss Franc Weekly Trading Forecast
Commodity Currencies Decline On Expectations For Further Global Contraction
The Commodity dollars declined against many of the majors today following US and European news that pointed to further economic slowdowns and thus, additional declines in demand for commodities. If economic activity declines or remains near current levels, prices on crude and other commodities will lose the support of projected demand increases that had propped them up for some time. In this regard, while the Canadian, Australian, and New Zealand countries are among the first to show signs of a recovery from the global crisis, a sharp drop in commodity prices could sharply alter conditions. As such, if global contraction continues and demand for basic materials declines, the currencies could continue to take a hit.

Related Article: New Zealand Dollar Weekly Trading Forecast, Canadian Dollar Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for and Stefan Tifigiu
E-mail: <[email protected]>