Here’s Why Euro Bulls Should Take Profits
The big question on the minds of traders today
was whether the solid jobless claims that we have been seeing, increasing help
wanted ads, lower Challenger layoffs and a recovery in the manufacturing sector
would be enough to grant us +180k job growth in the month of July. Today, we
learned that not only did we add 207k jobs last month, but the payroll data for
the month of June was also revised higher from 146k to 166k. After 2 months of
disappointments, we are finally seeing a month of surprise, which is helping the
dollar to rally.
This is extremely positive going into next week’s
Federal Reserve monetary policy meeting, which is the next major event on the
agenda. As far as we stand, there is nothing stopping the Fed. A quarter point
hike to 3.50% has already been priced into the market. Today’s blockbuster
report makes 4.00% almost a certainly with the Fed possibly even overshooting to
4.25%. Normally the Fed would probably stop at 4.00%, but the conundrum in
long-term rates will tempt them to raise interest rates beyond what may be
appropriate. The longer long-term rates remain low, the longer the Federal
Reserve has to continue raising interest rates. With the rate hike mostly priced
in though, all eyes will be on the FOMC statement.
For the time being, this is a good reason for euro bulls to take profits after
the explosive gains this week. However, the dollar rally may be short-lived.
With oil prices solidly above $60 a barrel, the Fed may also upgrade the risks
for inflation. Right now consumers are somewhat shielded from the skyrocketing
cost of oil because they have the capability of lowering consumption and opting
to car pool or use mass transit as oil prices rise. However, once the weather
starts turning cooler and everyone needs to get their heaters running once
again, $60 oil may be too much for the average consumer to bear. At this point,
the Fed will probably be done tightening, there should be a lot of uncertainty
surrounding Greenspan’s departure, along with his possible successor and
consumers may be hit with a cost that they cannot avoid. Taken together, this
could be disastrous for the US dollar.