EUR/USD Tests All-Time High?

EUR/USD is now quite close to its all time high of 1.4970 and its short term outlook is now dependent on US economic data. US data coming out this week include January PPI, durable goods, PCE and consumer sentiment data. EUR/USD could possibly touch 1.5000 this week if US data turn out negative.

Dallas Fed’s Fisher said he sees recent inflation news as not encouraging. His concern is upside inflation risk down the road, especially after the higher CPI rise for January, record oil prices, and the lagged impact of aggressive Fed easings. He sees slower growth, but not “prolonged negative activity”. Regarding interest rates, Fisher noted that to shift gears is “precarious” and it may be harder in practice than in theory to reverse cuts.

US dollar sentiment looks bearish at the moment as traders focus on the negative points of the US economy. Recent euphoria about the low rates stimulating the US economy has faded as inflation concerns mount. Stagflation is a truly undesirable economic situation.

USD Weakens In Forex Market

Broad US Dollar weakness in the forex market helped propel EUR/USD 100 pips past 1.4760 to 1.4860, exceeding initial bull targets, and USD/CHF fell to a 3-week low around 1.0830. The Eurozone Purchasing Managers Index, a measure of private sector activity, rose to 52.7 in February from 51.8 a month earlier, instead of contracting to an expected 51.4.

European and US stocks fell amid concerns about the financial crisis, thus the Japanese yen advanced against other currencies such as Euro and US dollar as investors pare their carry trade positions. USD/JPY fell below 107.00.

Sterling Lifts By Strong Retail Sales Data

The consumer is alive and kicking in the UK. UK retail sales chalked up its largest monthly gain in 11 months in January. Sales rose 0.8% m/m and 5.6% y/y versus expectations of 0.3% and 4.7%. Such strong retail sales numbers are unexpected, given the sluggish state of the UK economy. The market is thinking the Bank of England may be unreluctant to cut interest rates further.

The British pound got a huge boost from this data - Cable rose 160 pips following the release, and its next bull targets are 1.9600 and 1.9630.

US Philadelphia Fed business index for February plummeted to -24, and that’s a jaw dropping fall compared to the -12 expected. January’s index was at -20.9. February’s drop is the biggest drop since October 2001.

The US dollar may trade to the downside following this data. EUR/USD’s next bull targets come at 1.4800, 1.4840-50.

US Dollar Rebounds On

According to the FOMC minutes, the Fed’s voting members noted "when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate". They said a low rate "now appeared appropriate for a time". They agreed that inflation was likely to moderate in coming quarters. Oil touched $100 yesterday and US CPI have ticked higher. However, they could raise rates again, like they noted in the FOMC minutes, which could give USD some support.

In the forex market, USD/CHF has to break above 1.1060 in order to target 1.1120 next, and if the latter is broken, the currency pair could gain more bullish steam.

Threats of Inflation In the US

US consumer prices rose more than expected in January. Consumer prices rose 0.4%, matching the gain in December. Core consumer prices, excluding food and energy, rose 0.3%, after a 0.2% gain the prior month. The core rate was up 2.5% from January 2007, the biggest jump since March 2007. This inflation data indicates that prices are increasing in the US, and may pose a bigger problem after the Fed’s recent big-mac rate cut.

The US dollar took this as "positive" news that the Fed may have to halt tightening, and rebounded against the Euro, Swiss franc and British pound.

The Bank of England’s February meeting minutes showed officials voted 8-1 to lower its main interest rate to 5.25%, with David Blanchflower voting for a half-point cut in more than six years. Not good. GBP/USD is nearing 1.9385, a two-week low, and is looking bearish.

US housing starts rose 0.8% (1.4% expected) in January, to a seasonally adjusted 1.012 million annual rate, after plunging 14.8% in December to 1.004 million.

Meanwhile, there is talk that the Landesbanks are in crisis. Landesbanks, owned by Germany’s states, provide banking services for regional banks and support for states’ economic initiatives. That adds to the slowing of bullish momentum in the Euro.