Written by Boris Schlossberg Senior Currency Strategist
Monday, 09 May 2005 GMT
Not surprising that after a sharp move on Friday, the FX markets spent
most of Monday consolidating their losses to the dollar. Friday's eye
opening NFP print of 274K vs. just 174K expected created a serious
shift in market psychology.
Some analysts are predicting the possibility of 50bp hike rather than
the "measured" 25bp hikes taken by Fed up to now. Overall the tone has
turned decidedly dollar bullish as the greenback now holds 100bp
premium on the euro with the market expecting the spread to possibly
double before the Fed finally takes a rest. Only two events on the
calendar this week could ruin that rosy scenario for dollar longs - US
Trade Balance data due this Wednesday and Advanced Retail Sales due
Thursday. If the Trade Balance registered a deficit of -$65 Billion or
greater then all of the structural concerns regarding the untenable US
Balance Sheet position would again come to the forefront and the
market may sell dollars once more. Retail sales on the other hand are
expected to improve to 0.7% from 0.3%, but the weekly department store
data has not been strong so a downside surprise is possible. For the
time being however, the path of least resistance for the EUR/USD
appears to be down.
Meanwhile GBP/USD continues to suffer another day of negative eco
data. While PPI inputs and housing numbers reported above
expectations, both Industrial and Manufacturing production wildly
missed their projections, printing at -1.2% and -1.6% vs.0.2% and 0.1%
respectively. As the slowdown in UK economy becomes more apparent to
the market and the pressure mounts on the BOE to lower rather than
raise rates, sterling may decline further as carry traders begin to
liquidate their positions en masse.
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