| 6/23/2008
3:00 PM: EUR/$..1.5522 $/JPY..107.79 GBP/$..1.9648
$/CHF..1.0456 AUD/$..0.9510 $/CAD..1.0144
Euro Slumps on Data
The dollar edged higher against the euro and
sterling at the start of the week, benefiting
from soft Eurozone and UK economic reports and
rising to 1.5469 and 1.9588, respectively. The
currency market continues to largely be driven
by sentiment over global interest rate differentials
as traders closely scrutinize economic reports
and gauge the scope and direction of monetary
policy moves by central banks.
In the coming week, the key highlight will be
the FOMC’s monetary policy announcement
scheduled for Wednesday afternoon. The market
is largely expecting the Fed to stand pat, while
the accompanying policy statement will be closely
assessed for clues as to when the FOMC will shift
to a tightening bias in order to curb inflation.
In light of the mixed views revealed in recent
Fed speak, the statement will likely express caution
over the inflationary outlook while simultaneously
attempting to temper market expectations for aggressive
policy tightening.
The US economic calendar consist of April consumer
confidence, durable goods orders, May new home
sales, Q1 GDP, Q1 core PCE, weekly jobless claims,
personal income, consumption, personal spending,
and the University of Michigan consumer sentiment
survey. The data this week will highlight the
current dilemma facing the Fed with consumer sentiment,
housing and manufacturing likely to remain weak
while inflation continues to tick higher. Despite
some hawkish rhetoric from the Fed’s Lacker,
who last week suggested the FOMC needed to aggressively
respond to persistent elevated inflation with
additional vigilance, given the current soft economic
outlook, we see the FOMC holding off until the
fourth quarter with only a 25-basis point hike.
Data hits Euro
The euro slumped to 1.5469 versus the dollar
following a bout of soft Eurozone economic reports,
which tempered expectations for rate hikes from
the ECB. Germany’s Ifo business sentiment
survey fell to its lowest level since 2005 with
the June business climate index falling to 101.3,
from 103.5 in May. The current conditions component
eased to 108.3, down from 110.1 in the previous
month.
Meanwhile, the Eurozone manufacturing PMI dipped
beneath the key 50-level, which distinguishes
between contraction and expansion to 49.1 in June
from 50.6. The services flash PMI also contracted,
declining to 49.5 versus 50.6 previously. Traders
will continue to closely analyze Eurozone economic
reports to gauge the scope in which the ECB can
tighten interest rates to contain inflation.
EURUSD will find support at 1.55, followed by
1.5470 and 1.5430. Additional floors will emerge
at 1.54, backed by 1.5350 and 1.53. On the upside,
resistance is seen at 1.5540, followed by 1.55
and 1.5550.
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