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Thursday June 23, 2005 - 10:41:27 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• GBP shrugs off MPC minutes – CBI survey alsoweak.

• EUR-USD soft but still struggling to establish nearterm direction. Key events due in next 1-2 weeks.

• Japanese activity data shows more strength.

• EUR-SEK breaks abo•ve key levels.

• US existing home sales feature today.

Market Outlook

GBP managed to withstand the shock of yesterday’s MPC minutes, which helped to reduce the odds against a rate cut atthe time of the next Inflation Report in August. On balance, itstill seems likely that the MPC will wait a little longer before reacting to the ongoing weakness in the consumer sector. It should not be forgotten that the slowdown in this sector and the likely impact this will have on debt appetite is actually a welcome development as far as the MPC is concerned. A rate cut will only be really needed if this slowdown starts to get out of hand. The likelihood of more weakness in the labour market over the coming months will raise this threat eventually, as labour market weakness will be a fresh negative dynamic for both the consumer and the housing market. However, it may not come soon enough for the August meeting. A 25bp rate cut in Q4 seems the more likely outcome.

There is scope for more negative news flow for GBP from the economic data, if it gets even worse, but with rates at a relatively high 4.75%, GBP should also command reasonable support against other low rate currencies. This not only relates to ‘yield’ but also the comfort of knowing that the MPC at least has some ammunition with which to fight off any eventual economic downturn. This is also the beauty of the much-vilified variable rate mortgage – it means monetary policy is more potent. As long as 0.6735 remains in place on EUR-GBP there will be downside risk to 0.6555-80. Below 0.6630 is the next trigger for some weakness.

The latest CBI manufacturing survey was released this morning and showed more weakness in the balances for output, orders and price expectations. The balance on output expectations was negative for the second successive month (the first time this has happened since Oct/Nov 2003), while orders were the weakest since Oct 2003. Expectations on output prices have also tailed off significantly since the strength seen in January. This number remained in negative territory (i.e. falling prices) for the second month in a row and is the weakest showing since March last year. It bodes well for a more subdued performance in core PPI output during the remainder of 2005 and could be a key comforting factor for the MPC when considering a rate cut.

EUR-USD has been generally soft this morning and this does leave some modest downside risk in the short-term. Below 1.2070 would suggest a test lower, although the low 1.20s and 1.1950-85 will be difficult to take out initially. Indeed, more consolidation could be seen over the next couple of weeks. There is the potential for a USD fillip from next week’s FOMC meeting, if as seems likely their gradual tightening message is left unaltered, but forthcoming ISM and employment reports may be viewed with some suspicion. A sub-50 ISM and another weak payrolls outcome would raise question marks about US economic strength and Fed tightening appetite. The ECB are due to meet in the week of the employment report, although they seem to be at pains at the moment to neutralise any rate cut speculation.

EUR-SEK has broken free of the key resistance area at 9.31- 9.33, which leaves risk up to 9.39 then the 9.50-9.60 area. Momentum continues to build against the SEK and further EURSEK upside looks likely in the short-term.

Japanese data releases were fairly reasonable last night. Latest activity indices showed a strong start to Q2 after solid growth in Q1 and while the m/m volatility in this data has been fairly high the underlying trend is clearly up. The chart shows the 3-m moving averages for the index levels. Japan may be struggling to create much in the way of solid employment growth and is still beset by consumer price deflation, but it would be wrong to describe the economy as being weak at the present time. Machinery orders data released last week also displayed decent trend growth. The MoF also released the latest business survey last night and they showed modest improvement compared to Q1. This would support an equally modest improvement in the main Tankan indices, which are due for release next Friday.

Day Ahead
US – existing home sales and weekly jobless claims are out in the US. All home sales reports have been showing strength in recent months and there is currently little threat from mortgage rates. Jobless claims have been steady.

Data/event EDT Consensus*

US Initial claims (w/e Jun 18) 08.30 +330k
US Continuing claims (w/e Jun 11) 08.30 2641k last
US Existing home sales (May) 10.00 7.14m
NZ GDP (Q1) q/q 18.45 +0.8%
JP CSPI (May) y/y 19.50 -0.4%

Latest data Actual Consensus*
NZ Current account (Q1) -NZ$1.4bn -NZ$1.2bn
JP MoF manu survey (Q2) -2.4 -7.6 last
JP MoF all-industry survey (Q2) +0.9 +0.6 last
JP Tertiary index (Apr) m/m +1.8% +1.5%
JP All-industry index (Apr) m/m +1.7% +1.3%
* Consensus unless stated

2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005


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