U.S. Forex Market Commentary

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5430 level and was capped around the $1.5565 level.  Technically, today’s intraday high was right around the 38.2% retracement of the move from $1.6020 to $1.5280.  Federal Reserve Chairman Bernanke spoke today and suggested central bankers cannot yet declare an end to the global credit crisis.  Bernanke pointed to “welcome signs” but added “conditions in financial markets are still far from normal.” He called on market participants to “deleverage, raise new capital, and improve risk management.”  The November federal funds futures contract is currently pricing in about a 40% chance the fed funds target rate will be 25bps higher.  Cleveland Fed President Pianalto reported “While even the core price measures in the United States are rising somewhat faster than I would prefer, and inflation presents a key risk to my outlook, I believe that the Federal Reserve's policy strategy remains compatible with a low and stable inflation rate.  The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote growth over time and to mitigate risks to economic activity.” In contrast, Richmond Fed President Lacker hawkishly said “appropriate monetary policy would ensure that (the run-up in food, energy, and commodities prices) even out over time, and do not impart a persistent inflation bias. Data released in the U.S. today saw April import prices up +1.8% m/m and +15.4% y/y while April retail sales were off 0.2% with the ex-autos component up +0.5%.  In eurozone news, European Central Bank member Noyer said inflation pressures “are at work in most parts of the world” partially as a result of countries’ ongoing link to the U.S. dollar.  Yesterday, ECB President Trichet said it is important to “preserve the firm anchoring of inflation expectations” and “ensure the absence of second-round effects.”  Euro bids are cited around the US$ 1.5230 level.