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30/6/2008 − The Current Market Sentiment

Mon, Jun 30 2008, 03:53 GMT
by Walid Salah El Din

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The market is waiting this week for very important releases. We wait for the ECB interest rate decision next Thursday which can be a hike by .25% on the recent high inflation rate amid the current new highs of crude oil prices. In the beginning of last week, the single currency could cover its loses after the decline of June IFO business climate index to 101.3 from 103.5 in May and EU PMI flash manufacturing index which dived in the contracting territory below 50 in June to 49.1 and the service index of the same period which has fallen to 49.5 too but this interest rate outlook has not changed in spite of these data which were not out of expectations as the global growth slow down after the crediting crisis.

From another side, the greenback was depressed recently by the miss confidence of its consumers and its negative impact on the demand and growth in US. The US consumer confidence has slumped in June to 50.4 and also the US Michigan consuming sentiment which declined again in June to 56.4 from 59.8 in May. The consuming confidence data are still effecting negatively on the greenback delaying the probability of a fed rate hiking again in the face of the building up inflation as the current high energy and commodities prices.

The Fed has mentioned in its recent US assessment after its interest rate decision to keep it unchanged at 2% again has signaled to that the downside risks to growth remain but it looks diminishing but the inflation upside risks have increased and its outlook uncertainty is high  but it can moderate in the coming months or next year. The words were not clear enough to the greenback suggesting that the current rate can be hold for a while comparing to the single currency which is expected to have an interest rate hike soon.

The pair has come back again to its experienced strong resistance at 1.58 fueled by prolonged greenback weakness as the new highs of oil prices which trigged a sell off wave in the equity market affecting negative on the greenback and positively on the Japanese yen which is the most attractive funding currency of the carry trades.

The Japanese yen has been boosted by this wave of selling in the stock markets and the high inflation rate of May which came above the market expectations in May. May Core National CPI y/y has come at 1.5% from .9% in April and May National CPI m/m has come at 1.3% from just .8% in April but in spite of these inflation rate the bank of Japan has not signaled yet an increased probability of tightening its monetary policy in the face of inflation caring of the current weak global demand and feeble growth conditions and this is widely expected which may not add to the Japanese yen. It is a similar case of what faces the BOE affecting negatively of the British pound.

The British pound has been boosted last week by the release of UK retail sales 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.

The UK GDP q/q came at .3% from .4% and y/y at 2.3% from 2.5% and the market was expecting .4% q/q and 2.5% again y/y and today UK June GFK consuming confidence has reached -34 from -29 in May which is its worst level since march 1990 when it reached -35 and also the houses prices have come lower by 1% in June for the ninth consecutive month which ca show how dovish is the current market sentiment towards the UK housing market and spending generally. 

We wait today for the release of Chicago PMI which is expected to deteriorate beneath 50 in the contracting territory to be 48.7 in June from 49.1 in May.

Best wishes

FX Consultant

Walid Salah El Din

E-Mail: mail@fx-recommends.com

Published on  Mon, Jun 30 2008, 03:55 GMT