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Tuesday August 2, 2005 - 21:56:50 GMT
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Euro 1.2250 Barrier – Fourth Time’s a Charm?

DailyFX Fundamentals 08-02-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Euro 1.2250 Barrier – Fourth Time’s a Charm?
· Dollar Shrugs Off More Good Data – Will Non-Farm Payrolls Deliver Us a Big Move?
· Yen Rises on Talk of End of Deflation in Japan

US Dollar

It has been a quiet day in the markets with the dollar being sold across the board against the majors. We received another batch of positive US data this morning but that has done little for the greenback. Personal income came in higher than expected at 0.5% while personal spending was right in line with expectations of 0.8%. The gains in the PCE deflator matched last month’s rise of 2.2%. Factory orders also grew by 1.0% (in line) with a sharp upward revision to the May data. Basically we continue to see good news on the health of the US economy and the case solidifies for 4% rates, but the market remains hesistant of taking any significant bias without seeing Friday’s non-farm payrolls number. Right now, estimates are calling for a solid 180k gain, up from 146k for the month of June. Jobless claims have been at attractive levels while we continue to see evidence of a recovery in the manufacturing sector. Yet the question remains, if we do get a 180k gain in payrolls, will it be enough to trigger a breakout in the EURUSD. Unfortunately an in line estimate will probably do little for the dollar. With some traders are expecting a downside surprise, we will probably see a knee jerk rally on the back of an 180-190k gain. If payrolls come in below 150k, we will probably see an extension in the EURUSD rally, but a much weaker number would be needed to see a meaningful break above 1.2250. Having already tested that level three times now, perhaps the fourth time’s a charm. Anything above 200k will probably cause a move back towards 1.2000.

Euro

For the fifth consecutive trading day, the Euro has strengthened against the dollar. In line with the recent trend that we have been seeing, Eurozone economic data continued to improve. The unemployment rate for the region remained unchanged in June, but the May rate was revised lower to 8.7% from 8.8%, which marked the first time in close to 2 years that the unemployment rate has been this low. Producer prices also accelerated in the month of June thanks to rising oil prices. At this rate, we may eventually see the ECB lean towards raising rates rather than lowering rates. When this becomes the case, we could see a sharp reversal in the dollar rally. Unfortunately this will not come on Thursday. We expect the ECB to remain firmly neutral. Meanwhile it is interesting to point out that all of the major banks whose research we have access to (which is at least 4 to 5) have been either closing out their EURUSD short positions or recommending EURUSD long positions. It will be interesting to see whether wall street’s experts are proven correct. Yet we remember that it wasn’t too long ago when wall street analysts were calling for 1.50 in the EURUSD when we were trading at 1.35.

British Pound

Adding considerable weight on the eve of the Bank of England’s policy meeting, the Confederation of British Industry released their monthly Distributive Trades Survey. According to the release, the retail sector remained weak as individuals look to be adversely affected by regional tax increases, housing valuation jitters and interest rates. As a result, consumption dipped as retailers have not seen annual increases in sales since the end of last year. Additionally, the volume of sales declined in the month adding pressure to previous calls for an interest rate cut. Although reporting nothing new, the survey does ultimately give something for policy makers to think about and confirms earlier fears that sluggish consumer spending would ultimately lead to the demise of the economy. Subsequently, the release also contributes heavily to recent speculation that interest rate reduction decisions are a for-sure thing. Sparked on earlier comments by Deputy Governor Sir Andrew Large last week, traders have increased the probability of a cut in the repurchase rate when the committee meets this time around. However, subtle doubt still remains as to the speed of additional cuts with short sterling futures aren’t pricing in much room for the rest of the year.

Japanese Yen

Gaining on the session, bullish yen traders bid the asian currency higher as suggestions that Japan’s seven year deflationary stint may be coming to an end filtered through the market. Bolstering today’s action were comments made by Bank of Japan Governor Fukui. According to the governor, current improvement in economic conditions was viable and the economy is making headway out of a soft patch. However, consumer prices remain relatively low as year on year increases in prices would have to be witnessed before any monetary policy changes can be considered. Rising on the aforementioned comments, the domestic currency rocketed higher in the session and disregarded continued loftiness in crude oil trading. Higher oil prices mean lower bottom lines for exporters and manufacturers as the economy imports close to 98 percent of its oil consumption. However, with recognition of potential inflationary concerns by policy officials, traders opted to side with a potential shift in monetary policy rather than a momentary rise in the precious commodity. Additionally, overall political risk was tempered during the session as Prime Minister Koizumi made conciliatory statements to his opponents in the Upper House as the vote on the postal privatization deadline looms. In changing previous overtones, the prime minister is hoping to sway considerable votes to approve the deal rather than build opposition as he had when previously speaking to the Lower House.


 

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