US Economic Data On A Role

I forgot to mention today's important release of CPI data in my blog entries this week.

Well, it turns out that CPI came in unchanged after analysts expected a 0.2% increase. At the same time industrial production also increased 0.2% after two months of declines. The FED might as well pat themselves on the back. With the economy resilient, the FED wont be in any rush to lower rates, and will continue to keep an eye on inflation.

This news was more than enough for the USD to continue gaining. And just this week I was fearing an extensive EUR/USD trend, but looks like it stopped in its tracks!

USD shows some life

USD bulls capitalized on today's positive economic data. With an increase in November's retail sales of 1%, the USD gained about 65 pips against the EUR. The pair continued that momentum to place itself at 1.3155 on Thursday afternoon.

It was good to see a pro USD reaction as it seemed that the EUR/USD was ready to take off.

We will see what the next catalyst is but I don't expect much movement beyond the 1.31-1.32 range.

read more at dailyfx, Retail Sales..

-Jose M.

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The Federal Reserve, A Very Focused Group

The FED reminded us yesterday that they are tough to budge on monetary policy. They give the impression that there must be very dour economic indicators to start lowering interest rates. This is in contrast to three years ago when they did not hesitate to bring rates to historic lows at 1%. Much credit must be given to them however, as the US recovered nicely from the 9-11 aftermath, and now inflation must be kept in check.

Analysts were hoping for indication of a rate decrease by March. In my opinion, it is a good idea to keep rates steady while the economy holds up as there's always a delay before the affects of rate changes are seen.

The real worry for me however is the currency exchange rate. The USD resisted rallying after two of the most influential reports were neutral to positive for the USD. Especially, the trade deficit coming in at a five year low. And no indication of interest rates lowering anytime soon! (Except a comment about substantial cooling in the housing market) Yet there was minimal move in the EUR/USD . The only reasons I could see are the exceptions to the positive news, mainly that changes to the deficit are mostly oil-related and that things with China did not change much, as imports still increased.

Resistance to these reports indicate to me that the EUR/USD is likely marking a clearly prolonged uptrend. We have two more chances to spark a rally by the way of economic reports, retail sales/consumer demand through the holidays and the next employment report. If there happens to be US positive news and the USD still resists a rally, then I wouldn't be surprised if we started testing all-time EUR/USD highs around 1.36 in early 2007.

FED decides whether to change interest rates

As the FED decides what to do with its monetary policy, it seems that the market has priced in that they will keep rates the same.

However, it seems like the likelihood of taking a new stance in monetary policy is the highest in a long time. Although most agree that rates will be unchanged for now, there seems to be a high level of uncertainty of what future policy will be. A moderate 3rd quarter GDP seemed to have eased some fears as the economy wasn't suffering as bad as some analysts thought. This will most like decrease pressure from the FEDs and they will be willing to leave rates unchanged for some time longer before they start descending.

There could be some interesting reactions depending on what comes out of this afternoon's report.