Monday June 6, 2005 - 09:37:51 GMT
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INVESTICA Ltd - www.investica.co.uk
Limited Euro relief
The Euro was unable to sustain a temporary push above the 1.23 level against the dollar and the Euro weakened back to 1.2220 in late New York on Friday, but made renewed gains in Europe on Monday.
The US employment data was significantly weaker than expected with a non-farm payroll increase of 78,000 compared with an unrevised 274,000 for April and expectations of a 180,000 increase. There was a further downturn in manufacturing employment and there was also a general slowing of labour demand. To some extent, the April and May data should be seen together and point to steady, but unspectacular, employment growth. The unemployment data was also stronger with a decline in the rate to 5.1% from 5.2% in April.
The slower employment growth and generally subdued data over the past week will inevitably raise further speculation that the economy is slowing and that the US Federal Reserve will consider a pause in the tightening process after the end-June interest rate decision. US yield considerations will still be positive, but a downgrading of tightening expectations will dampen dollar buying interest.
Euro-zone political fears will remain an important focus as the constitution rejection implications remain under scrutiny. The Euro will inevitably be vulnerable if there is further speculation over a break-up of the Euro or calls or individual countries to withdraw. Euro-zone economic confidence will also remain weak and comments on interest rates will remain an important focus. ECB Chairman Issing has ruled out a short-term rate cut, but has offered some hint over medium-term flexibility. There is little possibility of a near-term move to cut rates with the ECB looking to open up its options.
The latest IMM data recorded an increase in short Euro positions of around 3,000 in the latest week, pushing the total to over 18,000. This is a 5-year high for short Euro positions and will maintain the risk of a corrective Euro recovery as long dollar positions are covered.
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