US Dollar Holds on to European Session Gains as Consumer Confidence Improves

The US dollar was the strongest of the majors on Friday as the currency staged a solid rebound against the Canadian dollar, Swiss franc, British pound, euro, Japanese yen, and Australian dollar. Looking to the economic data on hand, the University of Michigan's consumer confidence index rose slightly less than expected to 69.0 for the month of June from 68.7. That said, this reading still marked a 9-month high, and a breakdown of the report revealed an interesting shift.

Indeed, in recent months we’ve seen that overall increases in the index were led by optimism about the economic outlook. However, this time around we saw a rather sharp rise in sentiment on current conditions to a 9-month high while confidence in the economic outlook actually fell for the first time since February. Meanwhile, rising gasoline prices seem to be spurring inflation concerns, as inflation expectations for 1-year ahead and 5-years ahead rose to 3.1 percent, up from 2.8 percent and 2.9 percent, respectively.

The Group of 8 (G8) will meet over the weekend, and while it may ultimately prove to be a non-event, traders should keep an eye out for the communiqué as indications that exit strategies for the stimulus measures enacted by members are being plotted could provide a boost to risk appetite when trading resumes on Sunday. Though highly unlikely, discussions about currencies would be sure to shake up the markets as well.

Next Wednesday, the latest inflation figures for the US are forecasted to show slight increases on a monthly basis, but clear weakness on an annual basis. Indeed, headline CPI is projected to have risen 0.3 percent during May, while the core measure, which excludes food and energy, is anticipated to rise 0.1 percent. Meanwhile, headline CPI is expected to have fallen 0.9 percent in May from a year ago, the steepest drop since February 1950, compared to a decline of 0.7 percent in April.

On the other hand, core CPI may have only eased to a 1.8 percent annual pace of growth from 1.9 percent, suggesting that volatile commodity prices are the sole reason for the contractions in headline inflation. Weaker than expected results have the potential to stoke deflation fears, but overall, the FX markets haven’t shown a strong reaction to past CPI reports, and this time around we may see more of the same.