US Dollar Weighed Down By Slowing Spending, Watch for NFPs Next Week

The US dollar inched lower on Friday as US indicators only added to the pile of evidence suggesting that the economy is far from recovery mode. First, personal spending and personal income both slowed to a 0.2 percent pace during the month of April, indicating that consumption is not only weak, but will likely remain so through Q2. Indeed, record energy prices, a collapse in the housing sector, and a deteriorating labor market create a less-than-ideal environment for spending to recover. In fact, sentiment during the month of May was confirmed at a 28 year low of 59.8, according to the University of Michigan consumer confidence survey. It is not only the consumer side of the coin suffering though, as Chicago PMI held below 50 for the fourth consecutive month, signaling a contraction in business activity. A breakdown of the index shows a surge in the prices paid component, as rocketing commodity prices are undoubtly pushing input costs higher. Given the pick up we've seen in US CPI figures in recent months, it appears that businesses are passing these costs on to customers. Looking ahead to next week, the US dollar faces heavy event risk from the release of the ISM reports for the manufacturing (Monday) and services (Wednesday) sectors. However, Friday’s non-farm payrolls release should – as usual – prove to be the main event, especially as payrolls are expected to fall negative for the fifth consecutive month. Watch for our NFP Preview on Thursday in order to get a better sense of how the odds stack up ahead of the release, and if you should be watching for a surprisingly strong (dollar bullish) or weak (dollar bearish) number.

Euro Growth Comes Under Fire Just As ECB Decision Approaches

After three straight days of hearty loses, the euro was finally able to regain its footing. However, the rebound was modest and more a result of position squaring rather than a fundamental change of trend. The economic offerings from the docket were a mixed bag for the liquid currency. For the bulls, the second teir and infrequently market moving Euro-Zone CPI estimate for May boosted hawkish sentiment ahead of next Thursday’s ECB rate decision. The outlook for price pressures in the consumer basket jumped more than economists had expected to a 3.6 percent clip – matching a sixteen year high. This isn’t too suprising considering the pass through energy prices and rising costs of lending. On the other side of the monetary policy coin however, was the more market-moving German retail sales report for April. Measuring consumer spending trends in the Euro Zone’s largest economy, this indicator is understandably a top mover. And, considering the surprise drop in consumption, it is no wonder the future hawkishness of the central bank is in doubt. Retail sales dropped 1.7 percent last month – marking the six time in the past eight months that spending has dropped. Interestingly enough, inflation was blamed for the drop in consumption – an interesting consideration for the ECB when they meet next week.

Commodity Dollars: Canadian Economy Contracts For The First Time In Nearly Five Years

The com bloc lost the support of its commodity correlation Friday as volatility for crude and gold settled. Instead, trading in the Canadian, Australian and New Zealand dollars were guided by active fundamental speculation. The loonie was arguably the most active currency among the three as traders received the growth numbers for March and the first quarter. Both readings would weigh on the Canadian dollar. Through March, the world’s 14th largest economy cooled 0.2 percent. Far more concerning though, the quarterly figure posted its first negative reading since 2003. Canada’s 0.3 percent clip of negative growth draws a notable contrast to the US’s as of yet positive readings. What’s more, the breakdown shows that the pressure on the economy is not just from the manufacturing sector’s troubles with unfavorable exchange rates and high input costs, but from trade and housing as well. For Australia, the Private Sector Credit report for April was a surprise fundamental driver. The 0.4 percent climb marked the smallest increase in borrowing in seven years – a reflection of high credit costs and perhaps fading consumer spending. No doubt, this will be a reading to consider next week when the RBA meets. There last report suggested they were considering a rate cut ealier this month. The RBNZ will likely raise similar concerns at their decision on Sunday.

British Pound: Bank of England Likely to Leave Rates Unchanged Next Week

The British pound experienced a choppy day of trading between 1.97 – 1.98, as GfK consumer confidence dropped to a more than 18-year low of -29 from -24. Conditions in the UK economy are increasingly looking like that of the US, especially givent the sharp slowdown in the UK housing sector. While this is surely of concern to the Bank of England’s Monetary Policy Committee, they are expected to leave rates steady next Thursday at 5.00 percent as rocketing inflation pressures prevent the them from focusing on tighter credit conditions and the collapse of the UK property markets. Since the MPC is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement, which should leave the market’s reaction to the news very muted.

Fundamentals Add To Risk Pressures In Yen’s Retreat

Risk appetite settled through Friday as traders looked to square the books at the end of a busy week. However, fundamental yen traders would find no peace as economic indicators would take up the reins to the yen’s steady decline. Typically, Japanese data has little influence on price action; yet today’s offerings were too influential to ignore. The national inflation number retreated from its decade high after the expiration of a gasoline tax, curbing hawkish feelings. The outlook for growth was more concerning. Consumer spending fell the most in 19 months while industrial production marked consecutive contractions for the first time in four years. This leaves little hope for any BoJ hike.

Kathy Lien is the Chief Currency Strategist at FXCM.