Talking Points
JPY LEI at 50% as expected
EZ Retail PMI slips but well above 50
UK Industrial Production surprises to the downside
US Calendar empty
NFP is Dollar Key
A very quiet open to the start of the week with EUR/USD barely moving 10 points either way from Fridays close as traders awaited the interest rate decision from the Fed due tomorrow at 16:15 GMT. Fridays disappointing payrolls report which produced only 113K jobs against expectations of 150K helped push the EUR/USD above the 1.2860 resistance level but traders have been reluctant to bid up the pair much past the 1.2900 figure on fears that the Fed may hike rates yet another 25bp instead of pausing as most economists expect.
One strong argument for continued Fed tightening is made on the basis of persistent inflationary pressures in theUS economy. Wages last month rose by 0.4% versus 0.3% expected and now stand 3.8% higher than last year. Tonights news that BP will take 400K barrels per day off line by shuttering its Prudhoe Bay facility due to severe pipeline corrosion rallied crude in overnight trading to $76/bbl further stoking inflationary fires. Just as BOE last week surprised the currency markets by hiking rates to 4.75%, the Fed may do the same in order to maintain its credibility as an inflation fighter. However, whether tomorrow or at its next meeting in September the Fed will need to pause as the US economic growth is clearly slowing down. In fact, for the first time in years main stream media is using the word recession once again as traders and analysts begin to worry that the contraction in the housing sector exacerbated by Feds tightening campaign may pull down the whole US economy. Therefore, even if the Fed does raise rates to 5.5% tomorrow the dollar rally may not have much follow through if traders begin to fear the possibility of a US recession.
On the economic front tonight euro bulls had little reason to cheer as the Retail PMI numbers missed expectation printing at 53.8 versus 54.7 consensus. Although well above the 50 boom/bust level, the retail data from the 12 member region shows that consumer continue to be impacted by the double whammy of rising oil prices and rising interest rates. In Italy, the Retail PMI numbers decreased for the sixth month in a row. However, on the positive side the employment component of the report continued to expand lending hope to the idea that consumer spending in the Euro-zone should accelerate as demand for workers improves.
