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DailyFX Forex Fundamentals 02-01-05

DailyFX Forex Fundamentals 02-01-05

By Kathy Lien, Chief Strategist of

· Dollar Stalls Ahead of Fed Rate Decision
· Euro Vulnerable to Weak German Employment Data
· Manufacturing Activity Plunges in the UK and Switzerland


The euro continues to trade in a wait-and-see mode. There is wide gamut of events for traders to choose from, ranging from tomorrow afternoon’s FOMC rate decision to this weekend’s G7 meeting. With ranges continuing to contract in the EURUSD, a breakout looks set to occur in the very near future and of course, any number of the events scheduled over the rest of this week could trigger the breakout. The problem however is that the direction of the breakout is very unclear, making it difficult for traders to commit to a one-sided position. What is apparent is that expectations are once again set very high for December ‘s US non-farm payrolls report, therefore any disappointment in US data could trigger a sharp rally in the EURUSD. According to the COT report released last week, open interest in the euro actually decreased. Many traders may be waiting on the sidelines for a clearer trend in the euro to develop before jumping onboard. Meanwhile, European data failed to lend support to the euro despite accelerated manufacturing activity in Italy, Germany and France. Activity in Italy actually tipped back into expansionary territory from contractionary conditions in December. The unemployment rate in the Eurozone also rose to a three month high of 8.9% in December from a downwardly revised 8.8% in November.


The dollar is modestly higher against the Swiss franc as the US manufacturing sector expanded for the twentieth consecutive month. Although the pace of acceleration was slower in January than in December, the sharp jump in the employment component of the report provided a strong case for optimism ahead of this Friday’s non-farm payroll release. The recent retracement in oil prices has also contributed to dollar strength. The Federal Reserve began its two-day monetary policy meeting today. Aside from deciding on interest rates and any changes to their statement, the Fed will also be releasing their forecasts for the economy and prices. As we have previously mentioned, the market has already discounted a quarter point rate hike. The key will lie in the FOMC statement. Canada’s error of underreporting US imports will throw a twist into the Fed’s discussions today. Nevertheless, the Fed will continue to raise rates towards neutrality, which is estimated to be between 3.5 and 4%. Meanwhile, Swiss PMI plunged to 51.7 from 54.1. The weakness in the dollar has taken a significant toll on Switzerland’s exports. This follows the weak KoF leading indicators report released this past Friday. The Swiss government has already cut its 2005 GDP forecasts from 2.0% to 1.5%.


Holding near a one week low, the British pound fell on relatively mixed economic data during the session. Economists saw manufacturing activity in Europe’s second largest economy dip for the fifth month in six as sluggish new orders contributed to the lower figure of 51.8 compared with economists’ estimates of a 53.6 reading. As a result, many are expecting the Bank of England to remain pat on any further interest rate moves in the near future as inklings of recessionary pressures loom over the economy. Confirming this notion is the drop in the yield of the June 2005 U.K. interest rate futures contracts. Falling 1 basis point to 4.86 percent, the decline suggests tepid expectations of rate hikes in comparison to last week’s 5 basis point rise. Additionally, evidence of a stabilizing housing market were seen through a better than expected mortgage approvals report. Rising 83,000 in December from a decade low of 77,000, approvals for homebuyers’ loans increased against estimates of 80,000. Consumer credit was also slightly higher adding 1.5 billion pounds versus a consensus expectation of 1.4 billion. Credit on cards and further unsecured loans were slightly higher as credit card usage slid to the lowest level since last April.


Remaining consolidated and confined to a 50-pip trap, staid price action describes the yen even as labor cash earnings for December dipped 1 percent compared with a previous 0.4 percent advance. Slipping for the seventh in eight months, labor earnings fell in light of a tight labor market suggesting that all may not be so optimistic in the land of the rising sun. Additionally, overtime earnings increased 2.8 percent as November’s reading rose 2 percent. Although accepted as more positive compared with the cash figure, the report suggested real wages fell 1.4 percent. As a result, with less disposable income, consumers may be reluctant to spend in the near term future, adding to an overall decline in domestic consumption. With little to no economic data on the horizon for the currency, traders will anticipate the December leading economic index on Friday in suggesting any signs of expansion in the world’s second largest economy.


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