Market sees the Fed less worried about inflation

Treasuries gained in the week that CPI rose 0.8 percent in July, the "fastest pace in 17 years". Even an unexpected rise in Industrial Production doesn't changed the view that the Fed expect that the slow growth could contain inflation. Futures contracts show that there is less than 25 percent chance for an interest rate rise by the end of the year.

• Fed's Stern expects that "the U.S. economy will probably continue on a path of slow growth, with unemployment rising and inflation easing", Bloomberg said.
• In another report, Chicago Fed President Charles Evans said the second half "likely be extremely sluggish" and inflation should ease "over the medium term".
• Dennis Lockhart, Federal Reserve Bank of Atlanta President, who is not a voting member until the next year, views "the current situation as reasonably balanced, with a great deal of uncertainty around both the downsides to growth and upsides to inflation".

Calendar Highlights: 18 – 22 August 2008

Calendar Highlights: 18 – 22 August 2008

MON 18 AUG:
0100 GBP Rightmove House Prices
000? JPY Bank of Japan Rate Decision
0700 JPY Leading Economic Index
0915 CHF Retail Sales
1100 EUR Euro-zone Trade Balance

TUE 19 AUG:
0330 AUD Reserve Bank of Australia's Board Minutes
000? EUR German Import Price Index
0600 EUR German Producer Prices
1100 EUR German ZEW Economic Sentiment
1430 USD Producer Price Index
1430 USD Housing Starts
1600 USD Fed's Fisher Speaks on U.S. Economy

WED 20 AUG:
0230 AUD Westpac Leading Index
0700 JPY Bank of Japan Monthly Report
1030 GBP Bank of England Minutes
1030 GBP Public Finance
1430 CAD Retail Sales

THU 21 AUG:
0150 JPY Merchandise Trade Balance
0800 JPY Machine Tool Orders
0815 CHF Trade Balance
0900 EUR Purchasing Manager Index
0915 CHF Producer & Import Prices
0930 EUR German Purchasing Manager Index
1000 EUR Euro-zone Purchasing Manager Index
1030 GBP Retail Sales
1030 GBP Total Retail Investment
1300 CAD Consumer Price Index
1600 USD Philadelphia Fed Manufacturing Index
1600 USD Leading Indicators

FRI 22 AUG:
0150 JPY Bank of Japan Monetary Policy Meeting Minutes
1000 EUR Euro-zone Current Account
1030 GBP Gross Domestic Product
1100 EUR Euro-zone Industrial New Orders
1600 USD Fed's Bernanke Speaks on Financial Stability

All times are in CET (Central Europe Time)
Source: dailyfx.com/calendar

NZ Retail Sales; Exploring Kiwi's Reaction

Retail sales in New Zealand rose 0.9 percent in June when analysts expected no change. However it is still showing a 1.5 percent decline on quarterly basis which is the first "back-to-back drop in a decade" and "the most in 13 years".

Recent data already showed that the economy contracted 0.3 percent in the first quarter, and another 0.5 percent decline is expected for the second quarter.

The data looks disappointing but the NZ dollar might have other reasons for its relatively positive reaction. I see it mostly in response to the decline in oil prices which continued from the last night through the Asian and European sessions and improved sentiment in equity markets. In addition, the University of Michigan Consumer Sentiment was expected to show improvement which could have worked in favor of high-yielding currencies as well as the Kiwi.

When Inflation doesn't Work!

The cost of living in Euro-zone and UK rose in June but the market reaction looks completely different to what you may remember from July. At that time, rising inflation headlines in addition to revived concerns on the health of the U.S. financial institutions, Freddie Mac and Fannie Mea specifically, helped both Euro and pound reaching their records highs against the dollar. However inflation my look not so frightening when everything pointing to the possibility of a sharp slowdown in global economic activity:

• IMF's World Economic Outlook Update in July pointed to an increasingly slowing economy in the UK, EU, and Japan.
• Gross Domestic Product shrunk in Euro-area in the second quarter, for the first time since introducing the Euro, after economy contracted in Germany and France, the two largest euro economies.
• Japan GDP also showed that the world second largest economy contracted at an annualized 2.4 percent in the second quarter when Japanese officials earlier warned about it.
• The data also showed negative numbers for Industrial Production in Japan, France, and Euro-area.
• Moreover, the war in Georgia just increased concerns about the security issues in European economies.

There were certainly reactions to this situation. Commodity prices lead by oil extended their declines. One month ago it was really difficult to imagine gold at 772 $/ounce but it happened on Aug 15.

The only winner was certainly the dollar which appreciated against all major currencies. The depreciation of sterling was the most in almost 37 years. Nevertheless, I think the appreciation of the greenback against the Yen was somewhat limited which may come from a widely reduction in carry-trading.

Finally, almost all economic data for the week were overshadowed, positively or negatively, by the big-picture which was the fear of a global economic slowdown. There was almost no significant reaction to the GDP or CPI in Euro-zone at the time of the releases showing that most of decisions had been already made.

The bet finally resulted in 8 percent loss

I closed my positions last night (after U.S market close). Every supports was broken and there was no supportive technical data. In addition, an only pre-order for buying GBPUSD automatically triggered at its daily support which resulted in 49 pip loss very soon.
Looking at sharp drop in commodities prices show that the market may be in an adjusting process. UK CPI and US Trade Balance are ahead but I have no specific plan for the rest of the week.
Although holding positions beyond a day was in contrast by my style but a relatively small size and making a difficult decision (closing all in loss) help to control the loss.
I forget it from now, looking toward the next week. (plan of the trade)