Thoughts on How the ECB and US Data may Impact the Dollar

Currency in Crisis

The ECB meeting and press conference are unlikely to provide fresh incentives to the market. The ECB is clearly on hold for a few more quarters ate least. The Q&A will be the more interesting, but even here Trichet is unlikely to make any revelations. The ECB is notably reluctant to promise any support to the weaker members. But none of those members appear poised to ask for help any time soon. Greece is to submit its plan to the EU tomorrow, while Greece and Portugal bonds are under strong downside pressure today.

US retail sales and inventory data is likely to be firm and the risk of both reports are on the upside. Neither continued lay offs two quarters into the recovery nor continued household deleveraging is preventing a pickup in consumption. Retail sales, excluding autos, have fallen only once since May 09. November's 1.2% rise, the strongest since January's 1.4% gain is unlikely to be replicated, a positive number is likely, and if so, Q4 09 will be the first quarter that there was not a monthly negative print since Q2 08.

Business inventories are likely to have risen and the risk is on the upside of the 0.3% consensus guesstimate. A strong inventories figure will likely solidify expectations for a 4% handle on Q4 09 GDP, but could see some shave Q1 10 forecasts, but still in the 3% area. In any event, any dollar positive reaction is likely to be short lived. Those kind of growth numbers are unlikely to prompt a shift in expectations of the trajectory of Fed policy. NY Fed President Dudley was very clear late yesterday. The Fed's "extended period of time" reference apparently is at least 6 months in duration and could be, Dudley said, as long as two years.

On balance then we look for the dollar to continue to surrender gains scored last month.