Fed’s Tough Talk On Inflation Boosts Dollar In Thursday’s Trading

This week has so far been a good one for the US dollar - the US currency rallied higher against other currencies like the Euro, Swiss franc, British pound and Japanese yen after the positive US GDP data that met expectations, following Wednesday’s better-than-expected durable goods orders. The government said today that US gross domestic product, a measure of goods and services produced, rose at a seasonally adjusted 0.9% annual rate in the first quarter, which was slightly higher than the first estimate of 0.6% growth in the first quarter. It’s a little irrelevant to still debate whether the US was “really” in a recession from January to March even though the GDP number shows borderline growth as we are already more than half into the second quarter. The biggest drag on the US economy is the fall in consumer spending, which makes up about 70% of GDP. A huge chunk of the overall GDP - about 1.17 percentage points - was cut by the 25.2% drop in residential fixed investment.

Higher Rates In US Soon? 

The US dollar also got a boost from Dallas Fed’s Richard Fisher who hinted that the Fed might raise interest rates “sooner rather than later”. He said that if inflation and inflation expectations keep getting worse, that he would “expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario”.

Fisher, a voting member of the FOMC, is the only member to dissent three times from decisions to cut the Fed funds rate, prefering no change. Yesterday Minneapolis Fed’s Gary Stern said that inflation is too high and the Fed will need to consider the timing and magnitude of any reversal in interest rate cuts.

UK Home Prices Fall Again

Nationwide reported that UK house prices fell 2.5% month-on-month in May, worse than the 0.5% decline expected, and that is the largest monthly decline ever, since record-keeping began in January 1991. May’s drop in home prices was the 7th straight month of declines, which was the longest consecutive period of monthly falls since 1992.

Forex Trading

EUR/USD broke out below 1.5600 to reach an intraday low around 1.5520. Downside targets are possibly 1.5480-90, then 1.5430. USD/CHF rallied for the third day in a row and hit a high around 1.0480 and next topside targets are around 1.0530, 1.0570-90. GBP/USD fell further today to to 1.9670 on weak housing data from the UK.

Friday:

German retail sales 0600 GMT

Italy CPI, Eurozone CPI, Eurozone unemployment rate 0900 GMT

Canada GDP 1230 GMT

US PCE core, personal spending 1230 GMT

US Chicago PMI 1345 GMT

US U of Mich confidence 1400 GMT

Greenspan speaks on economy, markets 1545 GMT

Boston Fed’s speaks on economic outlook 1630 GMT

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