Talking Points
• Japanese Yen: Falls Below 103.50
• Euro: Breaks Above 1.570 as German IFO Unexpectedly Rises
• Pound: BoE Voted 8-1 To Leave Rates Unchanged
• US Dollar: FOMC Minutes On Tap
The German IFO Institute business confidence survey rebounded, sending the Euro above 1.570 for the first time since last month’s survey disappointed. The gauge saw advances in all three components with the business climate index rising to 103.5 from 102.4; current assessment to 110.1 from 108.4 and expectations to 97.3 from 96.8. German executive’s confidence increased in the manufacturing and trade sectors on the back of continued strong demand from emerging markets.
The Euro rallied over 100 points on the news building on yesterday’s gains, after ZEW head Wolfgang Franz stated that the ECB would raise rates in the near future. It looked like the pair was about to run into resistance, especially after the dismal German ZEW report, before the comments reignited the rate hike rhetoric that ECB officials have been trying to diffuse. President Trichet has continued to reaffirm his hawkish stance, but has been deliberate in not signaling a potential hike. Regardless, the elimination of a possible rate cut this year has seen the pair rally since breaking below 1.530 on May 7th.
The release of the BoE’s minutes from their May 8th policy meeting revealed that they voted 8-1 in favor of keeping their benchmark interest rate at 5.00%, with perennial dove David Blanchflower the lone dissenter. The sterling jumped 25 points on the news, but immediately retraced, as last week’s quarterly inflation report previewed the central bank’s bias. In the report, Governor King stated that he expects inflation to remain above the 3% threshold for several quarters, making it prohibitive for the MPC to cut rates further. The committee acknowledged the downside risks to growth due to declining property values, but felt that the slowdown was needed to rein in inflation, fueling the belief that they may leave rates unchanged for the remainder of the year.
The FOMC meeting will be released today and they may express a similar sentiment. Although, the U.S. housing situation is a lot closer to a bottom than the U.K. it still remains soft and a concern for the Fed. Nevertheless, oil prices rising above $128 a barrel has shifted the global concern towards inflation and leading to expectations that the central bank’s easing policy has ended. The focus for traders will be how hawkish was the committee, since expectations are that the MPC will look to tighten as soon as possible. Chairman Bernanke and company are fearful that an overabundance of liquidity for a prolonged period will give rise to future bubbles.
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