Dollar Strength May Fade With Reports Next Week

US Dollar - It was US dollar strength yet again on the session even with the lack of economic data to boost the underlying currency higher in theNew York hours.  Mostly attributed to repositioning in the market, next week’s data points should provide for some key tests in the FX market.  A heavy schedule will include advance retail sales figures and consumer price index along with manufacturing and industrial production snippets.  However, the optimistic momentum seen over the past several sessions may run short as all relevant reports are expected to show declining momentum in the economy.  The most important report will likely be the consumer price index and retail sales figures for the month.  Already showing an overall decline in the prices that consumers pay, the index is likely to show further slowing of price increases as commodity and raw material prices have declined over the month.  Couple that with a lowered consensus on retail sales, and the sentiment is likely to confirm that central bankers in the US will imminently keep rates at the current 5.25 percent going into yearend.  Granted there may be a chance to raise rates at the end of the fourth quarter as spending historically picks up.  However, actual increases versus expected increases may fall well short of the Fed’s estimates in considering a rate hike at this point.  The aforementioned will likely keep pressure on the dollar in the near term as futures traders are also siding with the bearish outlook, pricing in a lower 12 percent probability of a rate hike in September.  Nonetheless, a surprise uptick can not be precluded as we have witnessed surprises in the past even as overall bearishness weighed heavily on the greenback.

Euro  - Data keeps getting better for the Euro zone, especially in the region’s largest economy.  In the overnight traders witnessed a continuation of the positive figures that have been released out of the country in recent months.  This time around, it was a higher trade surplus balance and a stabilized leading indicator report.  For the month of July, the trade balance rose to a surplus of 13.1 billion euros, sustaining the gain seen in the previous month of 13.3 billion.  The figure was better than expected against a widely anticipated drop to 12.7 billion for the month.  Attributed to the tick higher was an increase of almost four times the consensus estimate of 0.6 percent on the monthly comparison as imports declined in tandem.  For the record, imports dipped to an increase of 2.8 percent while exports launched higher by 2.3 percent.  The report still indicates that the region’s export market continues to expand, contributing heavily to the turn around currently taking place in the economy.  The leading indicator index additionally added to widespread optimism as the OECD report printed a 109.1, continuing the expansive pace seen in the month of June of a 109.8 print.  All positive reports, the central bank would be more than convinced to continue their tightening campaign should consumer prices additionally rise in next week’s report.  With both growth and inflationary pressures to fuel the hawkish tendency, it won’t be a question of when but how many increases the bank will take on in the coming quarter.

British Pound - Pound data was non existent on the day, but that didn’t stop bears from pouncing on the underlying currency as repositioning continued to take the sterling lower.  Next week’s attitude should improve on the pound as US data is likely to disappoint and traders look ahead to a slew of economic reports for the United Kingdom economy.  Garnering most of the attention next week will likely be the consumer prices index along with the monthly retail sales figures.  Higher consumer prices at this point would only firm up speculation of further rate hikes by year end as traders remain convinced that Governor Mervyn King remains dead set on the relatively higher rate of inflationary currently looming over the economy.  Subsequently, a higher report would add confirmation to the notion, bringing to light the question of the timing of the decision rather than the actual decision itself.  In addition, a higher retail sales report would add to overall bullishness as consumer reluctance has been somewhat of a focus for the central bank.  With a bulk of overall growth being attributed to the GDP component, approximately 60 percent, it’s easy to see why policy makers continue to push for more consumer spending.  The report, in essence, should simply be a reflection of the higher retail sector survey seen earlier this month.  Ultimately, both reports would add to pound strength in the near term, reversing the week’s sentiment as we head into the fall season.

Japanese Yen – No surprises in the overnight as the Bank of Japan kept rates at the current 0.25 percent standing.  Additionally unsurprising is the torridly slow pace at which policy makers are considering hiking interest rates.  However, the notion could come to an abrupt end in the second half of the year as overall economic fundamentals continue to sport positive results for the world’s second largest economy.  Inflationary pressures are definitely there, along with increases in manufacturing and exporting.  Even business leaders see a brighter future as witnessed through the capital expenditures report released last week, boosting investment for consecutive quarters.  However, even individuals are recognizing the fact that spending in the country has been slow to catch up to these positive factors.  This notion alone is keeping rates at the record low as policy makers remain concerned over the consumer’s hesitance.  With the individual contributing to over 50 percent of overall economic growth, the concerns are well warranted.  Raise rates up too fast and you jeopardize losing the very consumption base foundation that builds any economy.  But given the consecutive quarters of positive expansion and the approach of the holiday season in the second half, we may see the re-emergence of the consumer yet.  Ultimately being the straw to break the camel’s back, should consumers return in droves, bankers will likely have to fight back to contain price increases in their historically conservative style.