·          Dollar Bearishness Sends EUR/USD to New Year to Date Highs

·          US Releases Weak Economic Data and Dovish Fed Minutes

·          Bank of England Minutes Expected to Deliver No Surprises


US Dollar


A dose weaker economic data and surprisingly dovish Federal Reserve meeting minutes have validated to traders that the most recent spate of dollar weakness may be merited.  European and Australian traders have returned from their extended holidays and are back in the markets, which mean that they have had a chance to express their own views.  Judging from today’s price action, especially at the onset of the London open, it appears that those traders are siding with the consensus set by Japanese and US traders yesterday.  The first piece of inflation numbers released this morning did not paint the bullish picture that dollar bulls were hoping for.   Headline producer prices did rise on the back of increases in energy costs, but core price growth remained subdued, rising by a less than expected 0.1 percent.  This indicates that many companies still face a limited ability to increase prices at the same pace as input costs may be rising.  The fear of dollar bulls is that we may have the same scenario in consumer prices, which would then validate the more dovish comments seen in today’s release of the FOMC minutes from the most recent Fed meeting, which was also Bernanke’s first.  To the surprise of the market, in sharp contrast to the more hawkish FOMC statement released last month, the minutes show that Fed members were actually more dovish. Their lengthy discussion of the housing market slowdown indicates that aside from many analysts, policy officials are also concerned about the potential impact of housing on the economy.  Today’s report of a 7.8 percent drop in housing starts, a 12 percent drop in single family homes to 16 month lows and a 5.5 percent drop in building permits are solid signs of a sector that is beginning to falter.  However, most worrisome to dollar bulls was the fact that Fed members felt that an end of rate rises was probably near and some even warned against tightening too much. This is definitely more dovish than the market was expecting and should give analysts that were calling for 5.5 to 6 percent rates a good reason to back down. Yet, broadly speaking, inflation is still a big concern given the new record high in energy prices, so we should still see at least one or two more rate hikes, making 5 or 5.25 percent rates the most likely top. Comments from Fed President Yellen today further validate a call for a more near term end to the tightening cycle.




Dollar bearishness has sent the Euro to fresh year to date highs. As we mentioned yesterday, if prices manage to hold above 1.2350, the next level of major resistance is not until 1.25.  There were no economic releases from the Eurozone this morning, leaving the speech by ECB member Caruana the only reference point for Euro traders.  Like many central bankers before him, Caruana warned of the inflation risks posed by higher oil prices.  It seems that he is concerned about second round effects and believes that policy is “still not very restrictive.”  The nominee for Otmar Issing’s seat on the central bank’s six member council seems to hold the same view as the current central bankers who have been calling for a tighter bias.  Juergen Stark said that the bank needs to show “great vigilance” in curbing inflation and he felt that even in spite of recent rate hikes, rates are still low enough to spur growth.  The economic calendar tomorrow still contains little Eurozone data, which means that for the time being, the single currency’s fate remains in the hands of US dollar traders. 


British Pound


The British pound extended yesterday’s massive gains against the dollar despite mixed housing market figures.  The RICS house price index reported a sharp fall in the month of March from a downwardly revised 16 percent to 13 percent, which is also the first decline that we have seen in the index since last May.  In contrast, the Rightmove House price report for the month of April showed a 1.1 percent monthly increase in prices.  Although the annualized pace of growth was slower, the number is still robust and suggests that April may have been a better month for the housing market than March.  Tomorrow, we are expecting the release of the minutes from the monetary policy meeting held earlier this month.  If you recall, the central bank left interest rates unchanged and have done so for the eighth consecutive month.  The balance of votes is expected to be held steady with Nickell once again voting in favor of lowering rates.  The number of votes will be 8 instead of 9 at the meeting following a recent resignation by Lambert. 


Japanese Yen


Yesterday’s moves in the Japanese Yen were repeated today with the currency selling off against all of the majors except for the US dollar.  The market is still looking to the Chinese President’s visit for more direction.  Treasury Secretary Snow was on the wires talking about how the Yuan will be apart of bilateral talks with China and that he felt China has not let its currency move enough.  The Japanese Yen is being punished by yet another record high in oil prices.  The country relies heavily on imports to meet their energy needs.  It is speculated that given the rise in crude prices, the Bank of Japan will probably notch higher their CPI forecasts in their annual outlook report due on April 28.  If this is true, then the market will perceive the higher inflation forecasts as the central bank taking a closer step to raising interest rates.