Friday July 29, 2005 - 10:00:10 GMT
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INVESTICA Ltd - www.investica.co.uk
GDP data will be important
The Euro/dollar rate was relatively choppy during Thursday as position adjustment continued. and the dollar dipped to lows of 1.2140 in New York. The dollar was little changed in early Europe on Friday before pushing stronger to 1.2085.
The GDP data will be important on Friday, both for evidence on the US economy and on the overall market positioning bias. A strong GDP data figure of at least 3.5% would reinforce near-term confidence in the US economy. The GDP deflator figures and the employment cost index will also be important for interest rate expectations. The recent evidence has suggested that inflationary pressure is contained and confirmation of this would give the Federal Reserve greater flexibility in interest rate policy, especially if labour costs remain subdued.
The GDP data reaction is also likely to offer important evidence on market positioning. If the dollar fails to rally on strong data this would suggest that there are still a high number of long dollar positions and this would reinforce strong dollar resistance close to the 1.20 level. It would also increase market concerns that dollar momentum is fading. Conversely, strong and sustained dollar gains after the data would reinforce near-term dollar optimism.
The Euro was weakened briefly by reports that Italian Prime Minister Berlusconi had criticised the Euro, but the shift in sentiment was illustrated by the fact that the Euro very quickly recovered ground. The Euro-zone money supply data was strong which will give the ECB greater ammunition in holding interest rates steady. The longer-term structural buying is still likely to weaken the dollar, especially with pressure for Asian central banks to diversify away from the US currency.
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