Monday 11th August 2008
The US Dollar broke technical levels and records last week posting the largest single day decline in Eurodollar in 7 ½ years. This bodes the question – Is this a false breakout or does this represent a fundamental shift behind a long-term trend change?
To attempt to answer that question, recall the growth outlook in the US. Recently published Q2 GDP calmed fears in the market however The Federal Reserve continues to warn about the downside risks to growth. The housing recession is still deepening, financial conditions have deteriorated to levels not seen since the peak of the credit crunch and moreover consumer spending, which makes up 70% of the economy, is in jeopardy. Perhaps the dominant force behind the dollar’s ultimate long-term direction is through interest rate expectations. Despite economic data that has been less than impressive, the outlook for interest rate hikes has gone relatively unchanged. Overnight swaps suggest the FOMC will deliver 75bps of tightening through the coming 12 months.
Key event risk this week:
A barrage of key economic data is due to be released this week including US and UK consumer prices, US retail sales and the Bank of England’s Quarterly inflation report; however the most market moving release is likely to be Euro-zone Q2 GDP as ECB President Trichet’s dovish commentary last week signaled concern for expansion in the region.
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