The dollar drifted lower slightly against the euro on concerns that a key inflation report due tomorrow may raise bets on a Fed rate cut in 2007. The foreign exchange market was quiet on Monday as there were few economic data. The euro hovers above the 1.35 handle against the dollar and faces a key short-term resistance at 1.3560. The sterling traded around 1.98 versus the dollar with no clear indication for a next move.
Recall that the latest FOMC meeting minutes eased worries on an early rate cut. However, the weak-than-expected retail sales report released last Friday sparked speculations on a Fed rate cut within this year. The market will focus on the US Consumer Price Index report due Tuesday for more insights on the inflation outlook and the monetary policy in future.
US CPI is expected to rise 0.5% in April, lower than the 0.6% rise a month earlier. Excluding food and energy, core CPI is estimated to rise on a monthly rate of 0.2%. NY Fed manufacturing index is seen rise from 3.8 to 8 in May. Besides, US net long-term TIC flows due 9:00 EST tomorrow morning may increase from 58.1 billion to 75 billion in March.
The Canadian dollar got rid of the impact from last week’s soft data and strengthened today versus the dollar. Should US CPI come in weaker-than-expected tomorrow, the pair is likely to head to the 29 ½ year low at 1.0931.
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