- US Dollar Down Sharply Despite ‘Strong Dollar’ Comment as Fed’s Bernanke Repeats Phrase on ‘Exceptionally Low Rates’
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Japanese Yen Diverges from US Dollar as GDP Rises by Most in 2+ Years
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British Pound Dominates Ahead of UK CPI on Tuesday
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Euro Tests 1.50 – Euro-zone CPI Reflects Falling Prices for Fifth Straight Month
US Dollar Down Sharply Despite ‘Strong Dollar’ Comment as Fed’s Bernanke Repeats Phrase on ‘Exceptionally Low Rates’
The US dollar experienced a brief surge this afternoon after Federal Reserve Chairman Ben Bernanke said during a speech that the central bank's policies "will help ensure that the dollar is strong and a source of global financial stability." However, the currency soon went back to its losing ways as Bernanke reiterated that the FOMC anticipates that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Just a few weeks ago, fed fund futures were pricing in a 25 basis point rate hike during Q2 2010, but given the very neutral commentary we've heard various Fed officials, the markets have now shifted to price one in during Q3 2010, explaining why the US dollar has been so weak lately.
In other US news, advance retail sales jumped 1.4 percent in October, led by a 7.4 percent surge in spending on motor vehicles and parts. Excluding autos, the index rose for a third straight month but only by 0.2 percent as important components like furniture, electronic, and building materials contracted. The data suggests that the headline reading isn't necessarily representative of broad demand and highlights the persistent downside risks for consumption. Meanwhile, the New York Fed's "Empire" manufacturing index surprisingly fell to 23.51 in November from 34.57, indicating a slowdown from the robust conditions reflected in October. A breakdown of the index shows that new orders, shipments, number of employees, and prices paid all rose during the month, but at a much weaker pace.
Related: US Dollar Could See Reversals on US Retail Sales, Speech by Fed’s Bernanke
Japanese Yen Diverges from US Dollar as GDP Rises by Most in 2+ Years
The Japanese yen was one of the strongest major currencies on a day when the greenback plunged and global equities rallied, highlighting a clear divergence. The moves came as USDJPY broke below last week’s lows following Fed Chairman Bernanke’s speech and after the preliminary reading of Japanese GDP was revised much higher than anticipated, as it reflected annualized growth of 4.8 percent in Q3 – the best in over 2 years - from 2.7 percent in Q2. Taking a look at the contributors to growth, private consumption rose 0.7 percent, suggesting that government incentives to purchase energy-efficient cars and appliances made an impact.
Meanwhile, exports rose 6.4 percent as growth improved in nations like the US, Euro-zone, and China, helping to lift foreign demand. Finally, capital spending increased 1.6 percent, indicating that businesses are feeling confident enough in the economic outlook to invest for the future.
Related: Discuss the Japanese Yen in the DailyFX Forum
British Pound Dominates Ahead of UK CPI on Tuesday
The British pound was the strongest of the majors as Bank of England Monetary Policy Committee (MPC) member Andrew Sentance said that the forecasts published by the bank last week highlight "the risk of keeping policy too loose for too long.” At the same time, Sentance also said that the UK is still in the "very early stages" of recovery, and that the removal of stimulus measures cannot be determined until "signs of recovery are sufficiently well-established." On Tuesday, the UK’s consumer price index (CPI) reading for the month of October is expected to rise 0.1 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to climb up to 1.4 percent from 1.1 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI surprisingly falls, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further. On the other hand, if CPI holds strong, the currency could rally in response.
Related: Discuss the British Pound in the DailyFX Forum
Euro Tests 1.50 – Euro-zone CPI Reflects Falling Prices for Fifth Straight Month
The euro rallied for another test of 1.50 on Monday, but lagged against many of the other majors as data showed that consumer prices in the Euro-zone declined for the fifth straight month in October as rising unemployment limited domestic demand growth. The headline consumer price index (CPI) for the region fell 0.1 percent from a year earlier after falling 0.3 percent in September.
Meanwhile, core CPI went unchanged at 1.2 percent, suggesting that volatile food and energy prices are behind much of weakness in inflation. All of this has generally been expected by the European Central Bank (ECB), as ECB President Jean-Claude Trichet at the beginning of the month that inflation will remain “subdued” in 2010 on “sluggish” demand.
Related: Discuss the Euro in the DailyFX Forum
