FX traders bet rate rises over, but are they right?
The Euro retreated off
the stop-fueled highs set in the Asian session to trade around the
1.1800 figure in early European dealing today. The economic backdrop for the
Euro-zone was actually rather positive with Italian Consumer confidence hitting
a 3 year high while EZ Industrial Orders rose a respectable 1.1% vs. 0.9%
consensus estimates.
Nevertheless the rise in the euro may have been a
case of too much too soon, as the unit rose nearly 170-points in a matter of 12
hours yesterday after the release of FOMC minutes which indicated that some
members were becoming concerned about the impact of rising rates on the US
economy.
The currency market interpreted the statement as
the signal for the end of the rate tightening cycle and traders promptly started
liquidating their dollar longs. Yet the reaction in the FX market may be a bit
premature. US economic growth continues to impress for the time being with
consumer spending remaining strong. The key to near term Fed policy will be the
upcoming Christmas season. Should sales meet or beat the industry’s robust
expectations (yesterday the National Retail Foundation raised their holiday
forecast to a 6.0% year over year gain from 5.0% previous estimate) 5% US rates
are not out of the question and in that case the dollar bull run will likely to
continue.
The one dark cloud in this rosy dollar long
scenario is energy costs. With a vicious cold front already covering the
Northeast consumers may be hit with materially higher heating bills which could
dampen their enthusiasm to shop. For the time being the euro may have more
upside to go as our contrarian internal positioning indicator has flipped
negative on the pair for the first time in a week.
However whether the EUR/USD has found true bottom
or is simply charting a natural oversold retrace remains to be seen. In UK
today, the BOE voted unanimously 9-0 to keep rates unchanged, and as a result of
the news the pound found support around the 1.7200 level.
The British Central Bank is convinced that
economic activity in the 1st half of 2006 will surpass the lackluster
performance of 2005 though recent data such as yesterday’s Industrial Trends
report which printed -25 offers little evidence for that thesis, Nevertheless
the market was relieved to have immediate pressure removed from sterling and
rallied the currency to 1.7250 in London trade.
Boris
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.