The FX markets remained motionless overnight, all but ignoring all of the economic data from Asia andEurope as dealing desks around the world prepared for the FOMC decision at 18:15 GMT today. On the economic front German unemployment improved markedly contracting by -49K against expectations of -30K as World Cup continues to stimulate spending in Euro-zone’s largest economy. The fact that German national team has progressed to the quarterfinals is highly beneficial to EZ consumer sentiment both psychologically and economically.

 

While life is likely to come to a standstill in Germany on Friday as the country huddles in front of the flat screen monitors to root for its national team, in the FX market the focus remains squarely on the Fed with the market keen to know if the Fed intends to move rates to 5.50% or even possibly 5.75% level as early as August.  Despite dollar bears’ predictions of imminent doom once rates crossed the 5% threshold,  the US economy has remained remarkably resilient in the face of higher rates and persistently higher oil prices. However,  greenback shorts may not have been wrong, just early.  The US housing bubble, like all bubbles before it refuses to pop quickly as buying momentum persists beyond all reason.  However, the weekly MBA data clearly shows that this key sector of the economy is experiencing serious problems. Yesterday’s data revealed that both the Market Index and Purchase Index are at new lows for the last 3 years. Another 50 basis points rate increase in the Fed funds rate is likely to drive up the cost of adjustable rate mortgages even higher, making housing less and less affordable for the majority of the US population.

 

For now the Fed has been able to tighten monetary policy without any detrimental effects to the US economy, but as it continues to ratchet rates higher, it raises the probability of a sharp contraction in housing  which in turn would lead to a significant slowdown in the overall economy.  That is why the FX market looks at the latest Fed actions with ambivalence. Traders like the ever increasing yield on USD assets but worry that these increases could trigger a US recession. This conflicting sentiment explains the lack of dollar strength  versus the euro, given the unit’s substantial interest rate advantage. Nevertheless,  should the Fed statement strike a hawkish note today, it  may well push the EUR/USD below the 1.2500 level and possibly even towards the 1.2400 figure as momentum traders test the resolve of euro bulls.  Any hint of hesitation, however, and the euro could see a rally on a classic “sell the news” dynamic.

 

 

FX Upcoming

 

Currency

GMT

EST

Release

Expected

Prior

USD

12:30

8:30

GDP Annualized (YoY) (1QF)

5.6%

5.3%

USD

12:30

8:30

GDP Price Index (1QF)

3.3%

3.3%

USD

12:30

8:30

Personal Consumption (1Q)

5.2%

5.2%

USD

12:30

8:30

Core PCE (QoQ) (1Q)

 

2.0%

USD

12:30

8:30

Initial Jobless Claims (JUN 24)

305K

308K

USD

12:30

8:30

Continuing Claims (JUN 17)

 

2439K

CAD

12:30

8:30

GDP (MoM) (APR)

0.1%

0.1%

CAD

12:30

8:30

Industrial Product Price (MoM) (MAY)

0.2%

1.3%

CAD

12:30

8:30

Raw Materials Price Index (MoM) (MAY)

1.0%

5.7%

USD

14:00

10:00

Help Wanted Index (MAY)

35

35

USD

18:15

14:15

FOMC Rate Decision

5.25%

5.00%

 

  

Currency

GMT

Release

Actual

EST

Previous

Comments 

JPY

23:50

Industrial Production (MoM) (MAY)

-1.0%

-0.1%

1.4%

Lower than expected

JPY

23:50

Industrial Production (YoY) (MAY)

4.2%

5.0%

3.6%

JPY

23:50

Shipments s.a. (MoM) (MAY)

-1.0%

-1.4%

2.6%

Better than anticipated.

JPY

23:50

Trade Balance n.s.a. (yen) (JUN)

417B

125B

-267B

JPY

4:00

Vehicle Production (YoY) (MAY)

3.5%

 

3.9%

Growth slows.

JPY

5:00

Small Business Confidence (JUN)

50.1

49.8

49.2

Improved from May.

CHF

5:45

SECO 2006 Economic Forecasts (JUN)

 

 

 

Outlook indicated growth.

CHF

5:45

Consumer Price Index (MoM) (JUN)

0.0%

-0.1%

0.2%

Stagnant on the month.

CHF

5:45

CPI (YoY) (JUN)

1.6%

1.5%

1.4%

GBP

6:00

Nationwide House Prices s.a. (MoM) (JUN)

0.3%

0.5%

0.2%

Housing market still expanding.

GBP

6:00

Nationwide House Prices n.s.a. (YoY) (JUN)

5.0%

5.2%

4.7%

EUR

6:00

German ILO Unemployment Rate (MAY)

8.0%

7.8%

7.9%

Worse in May.

EUR

6:50

French Gross Domestic Product (QoQ) (1Q)

0.5%

0.5%

0.3%

In line with expectations.

EUR

6:50

French GDP (YoY) (1Q)

1.5%

1.5%

1.1%

EUR

7:55

German Unemployment Change (000's) (JUN)

-49K

-30K

-93K

Employment improves on World Cup demand

EUR

7:55

German Unemployment Rate sa. (JUN)

10.9%

11.0%

11.0%

EUR

8:00

Euro-Zone M3 sa. (YoY) (MAY)

8.9%

8.8%

8.8%

Continues to accelerate.

EUR

8:00

Euro-Zone M3 sa. 3 mth ave. (MAY)

8.7%

8.7%

8.4%

GBP

8:30

M4 Money Supply (MoM) (MAY)

0.6%

 

1.3%

Money supply and lending still picking up the pace.

GBP

8:30

M4 Money Supply (YoY) (MAY)

11.7%

 

13.1%

GBP

8:30

M4 Sterling Lending (British Pounds) (MAY)

17.4B

 

16.1B

GBP

8:30

Net Consumer Credit (MAY)

1.2B

1.0B

0.8B

GBP

8:30

Net Lending Sec. on Dwellings (MAY)

9.3B

9.0B

8.5B

GBP

8:30

Mortgage Approvals (MAY)

117K

110K

106K

Higher than expected.