Today’s personal income and spending reports show more prudent US consumers, and with continued recovery in the labor markets, the Fed is more likely to stay its course toward tapering asset purchases this year.
The US dollar (USD) is trading lower against most major currencies thanks to the recent steadiness of global bond yields. US ten-year yields are trading below 2.5% this morning, while European and Asian bond yields have fallen across the board, and overnight SHIBOR rates in China have settled around 5.56%.
Many will recall how the recent havoc in the financial markets was caused by the spike in US and Chinese yields last week, and now that those yields have retreated, volatility has declined with equities and currencies trading higher.
This morning's US economic reports were in line with expectations, as personal income posted a 0.5% increase while personal spending grew by 0.3%. The healthy trend of stronger income versus spending is a dynamic that will delight the Federal Reserve because it signals Americans will be more frugal with their spending.
The PCE deflator rose 0.1%, which suggests that inflationary pressures are beginning to increase. Jobless claims, on the other hand, dropped from 355K to 346K, a number that is generally consistent with a continued recovery in the labor market.
Overall, these reports kept the dollar bid against the Japanese yen (JPY) but failed to have significant impact on its performance against the euro (EUR).
Later this morning, Fed policymakers and Federal Open Market Committee (FOMC) voters William Dudley and Jerome Powell will be speaking about the labor market and monetary policy. Both of these policymakers typically favor a more dovish monetary stance, and if they support Fed Chairman Ben Bernanke's view that asset purchases should be tapered this year, EURUSD could retest 1.30.
However, if either expresses skepticism or reservations about Bernanke's timing for reducing asset purchases, EURUSD could make its way back up to 1.31.
By Kathy Lien of BK Asset Management