Forex: U.S. Dollar Rebounds on Faster Wage Growth, Higher Consumption – All Eyes On ECB, BoE

Higher inflation in Europe pushed the EUR/USD to a high of 1.4877 on Friday, and the single-currency may appreciate further ahead of the European Central Bank interest rate decision in May as investors anticipate to see higher borrowing costs over the coming months.

Talking Points

• British Pound: BoE To Maintain Current Policy In May
• Euro: Inflation Tops Forecast, European Confidence Wavers
• U.S. Dollar: Chicago PMI, Fed Chairman Bernanke On Tap

Higher inflation in Europe pushed the EUR/USD to a high of 1.4877 on Friday, and the single-currency may appreciate further ahead of the European Central Bank interest rate decision in May as investors anticipate to see higher borrowing costs over the coming months. The Euro-Zone consumer price estimate increased at an annualized pace of 2.8% in April to mark the fastest pace of growth since October 2008, and the Governing Council may see scope to reestablish its exit strategy going into the second-half of the year as the group toughens its stance against inflation.

According to Credit Suisse overnight index swaps, investors are pricing the benchmark interest rate to increase by 75bp over the next 12-months, and the EUR/USD certainly looks poised to make a run at 1.5000 ahead of the ECB interest rate decision scheduled for the following week as it maintains the upward trend from earlier this year. However, as consumer and business confidence in Europe wanes, with the annual rate of unemployment holding at 9.9%, market participants expect the central bank to keep the benchmark interest rate at 1.25% next month, and we may see ECB President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy given the ongoing weakness within the real economy. In turn, the Governing Council may keep borrowing costs on hold throughout the first-half of the year, and may have little choice but to delay its exit strategy further as the economic outlook remains clouded with high uncertainly.

The British Pound gained ground on Friday, with the exchange rate advancing to at high of 1.669, and the bullish sentiment underlying the sterling may gather pace ahead of the Bank of England interest rate decision next week as the U.K. economy skirts a double-dip recession. The rebound in growth could certainly encourage the BoE to raise its economic assessment for the region, and the central bank may see scope to start normalizing monetary policy going into the second-half of the year as growth and inflation accelerates. The MPC is widely expected to keep the benchmark interest rate at 0.50% in May while maintain its asset purchase target at GBP 200B, while investors expect borrowing costs in the U.K. to increase by nearly 50bp over the next 12-months according to Credit Suisse overnight index swaps. As the GBP/USD breaks out of the range from earlier this month, the exchange rate may make a run at 1.6800 ahead of the policy meeting next week, but currency traders may show a muted reaction to the rate decision as the central bank refrains from releasing a statement.

The U.S. dollar weakened across the board going into the end of the week, with the Australian dollar and the Swiss franc hitting fresh, but the positive developments appear to be providing some support for the reserve-currency as it pares the sharp decline from the overnight trade. As wage growth gathers pace, with households increasing their rate of consumption, the data certainly reinforces an improved outlook for the world's largest economy as private sector demands remain one of the leading drivers of growth, and the U.S. dollar may regain its footing during the North American trade as the recovery gathers pace. However, with Fed Chairman Ben Bernanke scheduled to speak later today, dovish comments from the central bank head could bear down on the exchange rate, and the small rebound in the greenback could be short-lived as the Fed maintains a cautious outlook for the real economy.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	13:45	9:45	Chicago Purchasing Manager (APR)	68.5	70.6
USD	13:55	9:55	U. of Michigan Confidence (APR F)	70.0	69.6
USD	14:00	10:00	NAPM-Milwaukee (APR)	--	66.0
USD	16:30	12:30	Fed Chairman Ben Bernanke Speaks on U.S. Economy

Currency	GMT	Release	Expected	Actual	Comments
NZD	22:45	Trade Balance (New Zealand dollars) (MAR)	200M	464M	Surplus widens for second month, highest since May 2010.
NZD	22:45	Balance (YTD) (New Zealand dollars) (MAR)	375.0	631.0
NZD	22:45	Exports (New Zealand dollars) (MAR)	4.20B	4.53B
NZD	22:45	Imports (New Zealand dollars) (MAR)	3.90B	4.07B
AUD	1:30	Private Sector Credit (MoM) (MAR)	0.4%	0.6%	Fastest pace of annualized growth since November.
AUD	1:30	Private Sector Credit (YoY) (MAR)	3.3%	3.6%
CNY	1:35	MNI Business Condition Survey (APR)	--	69.28	Weakens from last month.
CNY	2:30	HSBC Purchasing Manager Index Manufacturing (APR)	--	51.8	Holds steady for second month.
NZD	3:00	Money Supply M3 (YoY) (MAR)	--	5.6%	Expands for the fourth month.
EUR	6:00	German Retail Sales (MoM) (MAR)	0.2%	-2.1%	Contracts for second month.
EUR	6:00	German Retail Sales (YoY) (MAR)	1.4%	-3.5%
EUR	6:45	French Producer Prices (MoM) (MAR)	0.7%	0.9%	Highest since August 2008.
EUR	6:45	French Producer Prices (YoY) (MAR)	6.4%	6.6%
EUR	8:00	Euro-Zone M3 s.a. (3M) (MAR)	1.9%	2.0%	Fastest pace of growth since September 2009.
EUR	8:00	Euro-Zone M3 s.a. (YoY) (MAR)	2.2%	2.3%
EUR	8:00	Italian Unemployment Rate s.a. (MAR P)	8.4%	8.3%	Highest since January.
EUR	9:00	Euro-Zone Consumer Price Index Estimate (YoY) (APR)	2.7%	2.8%	Highest since October 2008.
EUR	9:00	Euro-Zone Unemployment Rate (MAR)	9.9%	9.9%	Holds steady for third month.
EUR	9:00	Euro-Zone Economic Confidence (APR)	107.0	106.2	Confidence weakens across Europe, weighing on the outlook for future growth.
EUR	9:00	Euro-Zone Business Climate Indicator (APR)	1.40	1.28
EUR	9:00	Euro-Zone Consumer Confidence (APR F)	-11.4	-11.6
EUR	9:00	Euro-Zone Industrial Confidence (APR)	6.6	5.8
EUR	9:00	Euro-Zone Services Confidence (APR)	10.5	10.4
EUR	9:00	Italian CPI (NIC incl. tobacco) (MoM) (APR P)	0.3%	0.5%	Highest since November 2008, raising bets for higher interest rates in Europe.
EUR	9:00	Italian CPI (NIC incl. tobacco) (YoY) (APR P)	2.4%	2.6%
EUR	9:00	Italian CPI - EU Harmonized (MoM) (APR P)	0.7%	1.1%
EUR	9:00	Italian CPI - EU Harmonized (YoY) (APR P)	2.6%	3.0%
CHF	9:30	KOF Swiss Leading Indicator (APR)	2.20	2.29	Rises for fourth month.
EUR	10:00	Italian Producer Price Index (MoM) (MAR)	--	0.7%	Highest since September 2008.
EUR	10:00	Italian Producer Price Index (YoY) (MAR)	--	6.1%
CAD	12:30	Gross Domestic Product (MoM) (FEB)	0.0%	-0.2%	First monthly contraction since September.
CAD	12:30	Gross Domestic Product (YoY) (FEB)	3.1%	2.9%
USD	12:30	Personal Spending (MAR)	0.5%	0.6%	Faster wage growth reinforces an improved outlook for growth and inflation.
USD	12:30	Personal Income (MAR)	0.4%	0.5%
USD	12:30	Personal Consumption Expenditure Core (MoM) (MAR)	0.1%	0.1%	Inflation quickens for the third month.
USD	12:30	Personal Consumption Expenditure Core (YoY) (MAR)	0.9%	0.9%
USD	12:30	PCE Deflator (YoY) (MAR)	1.9%	1.8%
USD	12:30	Employment Cost Index (1Q)	0.5%	0.6%	Grows the most in 12-months.