by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Friday, May 30, 2008
The dollar strengthened after the German retail sales data on Friday and pushed to a high around 1.5460 before consolidation around the 1.55 level ahead of the New York open.
The Euro-zone growth data remained weak with a further sharp 1.7% decline in German retail sales for April while reports also suggested that car sales had dipped sharply in May. The structural unease will also tend to be sustained by the wider Spanish current account deficit.
The preliminary Euro-zone inflation data recorded an increase to 3.6% in May from 3.3% the previous month, mirroring the increase in German inflation reported earlier in the week. Inflation fears will continue to fuel tough ECB rhetoric and the central bank interest rate decision will be important for Euro confidence next week. Comments from the ECOFIN meeting will also be monitored closely. Any notable political pressure for a policy shift by the ECB would tend to undermine the Euro.
The US data releases did not have a significant impact on Friday with the University of Michigan consumer confidence index recording a marginal recovery in the final May reading. The Chicago PMI index was slightly above expectations, although it remained below the 50.0 level at 49.1. Consumer spending was also subdued in April according to the latest data.
The core PCE inflation index recorded a 0.1% increase for a 2.1% annual increase which did not trigger any major reaction in interest rate futures. The US data will be watched very closely next week with key PMI and employment releases. Weak data would curb market speculation over a fourth-quarter interest rate increase which would hurt the dollar.
A rally in oil prices and a covering of short Euro positions pushed the dollar back to 1.5560 later in US trading.
The batch of Japanese data released on Friday continued to suggest significant weakness in the economy. Industrial production fell 0.3% in April as exports were subdued while there was a 2.7% annual decline in household spending as the unemployment rate edged up to 4.0% from 3.8%. The persistent evidence of weakness will tend to unsettle the yen even if the direct impact is limited.
Sterling strengthened to a high near 0.7830 against the Euro in European trading on Friday, but was unable to sustain the gains and weakened back to around 0.7860 in US trading. Sterling found support below 1.97 against the dollar during the day.
UK consumer confidence remained under pressure with a decline to -29 in the latest Gfk survey from -24 which was the weakest outcome since 1990. The UK outlook will remain a serious cause for concern and will be a negative Sterling factor, but the impact will be offset to some extent by the downturn in confidence towards the European economy.
The PMI report for the manufacturing sector will be watched closely on Monday and any dip to below the 50.0 level would provide a stern test of confidence in the UK currency.
The dollar again challenged levels above the 1.0520 level against the franc on Friday, but failed to sustain the advance and weakened back to 1.0420 in US trading. The US currency was subjected to profit taking following a significant advance over the past few days while the Swiss currency again found support close to the 1.63 level against the Euro.
The Swiss KOF index weakened to 1.09 in May from a revised 1.21 reading the previous month. The index has weakened consistently over the past six months from a reading above the 2.00 level. The deterioration will maintain expectations of a sustained slowdown in the Swiss economy which will curb franc demand.
The domestic influences were generally limited on Friday, but the smaller than expected 0.4% increase in private credit was a small negative factor for the currency. The Australian dollar moves were again dominated by the trends in commodity prices. The currency was holding close to 0.9550 in early Europe on Friday before dipping to lows near 0.95 in early New York
A rally in gold and oil prices allowed the Australian currency to consolidate above the 0.95 level with sentiment towards the currency still generally firm.