The Calm Before The Storm?

July 13, 2004
Dave Floyd

The Calm Before The Storm?

FX markets were on hold yesterday as a whole host
of economic reports are due out later this week.Â

With FX and bond markets
growing more concerned with inflation rather than the underlying strength of the
economy, the coming week should prove telling.Â A whole host of inflation data
is due this week, and with it the possibility of some good moves in FX.

Tuesday:

Spain:Â Â Â Â Â Â Â Consumer
Prices â€” June

UK:Â Â Â Â Â Â Â Â Â Â CPI – June

Wednesday:

UK:Â Â Â Â Â Â Â Â Average
earnings

US:Â Â Â Â Â Â Â Â Retail Sales

Thursday:

USA:Â Â Â Â Â Â PPI â€” June

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Initial
Claims

Friday:

USA:Â Â Â Â Â Â CPI â€” June

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Consumer
Prices

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Consumer
Sentiment

As one can see, this
sampling of data will begin to determine if the recent observations of slow
growth and increasing inflation are in fact warranted.Â It will be a tricky
place for the Fed to be if this starts to play out.

Naturally this data can be
volatile, but some facts cannot be ignored.Â For the last 10 years, the US has
averaged real GDP growth of 3.2%.Â Since 2001, that number is 1.9%.Â Even if
some of the optimistic projections of GDP growth for 2004, some as high as 5%,
this still would not being overall growth to a level that would cause
inflationary pressures.Â In fact, one would reasonably assume deflationary
pressures under this data.

Both the ISM prices paid data
and inflation expectations as surveyed by the University of Michigan suggestÂ
5-year inflation expectations as being higher.Â Unless the data going forward
begins to change, the Fed will be in an awkward place; raise rates to curb
inflation or stay on

hold to avoid snuffing out economic activity?
Either scenario will not be conducive to a stronger Dollar.

The remainder of today’s
article will be devoted to some current thoughts on the technical picture
developing in some of the major pairs.

Lastly, the good
news….summer trading is halfway over, 45 days to go until Labor Day!