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23/6/2008 − The Current Market Sentient

Mon, Jun 23 2008, 07:52 GMT
by Walid Salah El Din

FX Recommends

After last Friday germane PPI release which came higher than the market expectation of .9% at 1% m/m and yearly at 6% and the market was waiting for 5.8%. We wait today for the flash releases of the June EU PMI services and manufacturing data and the germane IFO which is expected to be 102.3 after the dovish germane ZEW economic sentiment of May which came negatively by 52.4 and good news can reinforce the market expectation of a coming ECB interest rate hike. The PPI data have shown that the inflation is still building up at the producing level specially at the current high energy and commodities prices which is still forming a threat of the price stability over the medium term earlier this week we have had the release of May which was the highest among them all at 3.7% which is the highest rate ever and well above the ECB target which is 2% which should underpin the ECB expectation of tightening which can support the single currency.

The British pound is still underpinned by the recent release of UK retail sales last week which surged in May by 3.5% m/m and 8.1% y/y. The surprising consuming data could contain the market sentiment after lightening the pressure on the BOE to cut. The recent BOE minutes have shown that the members have discussed all options but they have ended to keeping interest rate unchanged by a split voting as there was only one member voted for a cut.

Mervyn King's letter to Chancellor of the Exchequer Alistair Darling which indicated that the current high inflation rate above 3% is temporary and it is to go lower but it can rise above 4$ in the next half of this year. The inflation rate has reached 3.3% y/y in May and the market was expecting 3.2% and .6% m/m from .8% m/m in April. The pound declined after the data not as the rising inflation currently does not smooth the way for a rate hike but it tells that the buying power of the British pound is going lower and the BOE is hold back from tightening as the weak growth. The high prices can tackle the growth further as it tackles the demand. The continued high prices of energy and commodities are going against the demand from another side which make the British economy outlook is threat by the recession forces which surely can dampen the demand for the cable which was almost rises recently in the times of the greenback weakness not on an optimistic change in UK as what have come from May UK retail sales figures recently.

From another side, The high oil prices are still weighing on the greenback as long as they  are still above 130$ per barrel with no change of the current market sentiment towards the oil after Jeddah meeting which can effect negatively on the greenback.

The greenback was depressed last week after No new announcement from the G8 finance ministers concerning the greenback depreciated value and its impact on the global inflation upside risks currently and also the weak NY June manufacturing index which came negatively by 8.68 and the market was expecting just -1.5. The treasury secretary Paulsen's comments have helped the greenback when he said that he would never take FX intervention off the table and the market was waiting for further aggressive announcement from this meeting but it was just the repeated mantra that he is still supporting the strong dollar policy and the US economic fundamentals are good. The greenback was supported recently by the market expectations of an end of the Fed's monetary easing cycle after the Fed's President Bernenke had indicated that the inflation upside risks which resulted from the dollar weakness causing concerns to the fed. The fed's cuts which were needed to stimulate growth after the credit crunch which resulted from the housing slump which triggered from the sub-prime mortgages bad loan have increased the greenback liquidity which affected negatively on its value and attractiveness. We wait later today for Ben Bernanke's speech which may give what's new after his recent optimistic speech that the policy is well positioned and the economic conditions are to get better in the second half and to go up in 2009 but the growth risks are still to the downside.

Best wishes

FX Consultant

Walid Salah El Din

E-Mail: mail@fx-recommends.com

Published on  Mon, Jun 23 2008, 07:54 GMT