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Thursday August 4, 2005 - 10:54:23 GMT
Mellon Bank Foreign Exchange -

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Forex: Mellon FX Daily - U.S. Edition

Key Points
• EUR-USD holding well above key levels after yesterday’s significant price action.

• GBP and JPY have been held back by specific issues – but GBP may rebound if MPC fails to offer signal about further rate cuts.

• German manufacturing orders stronger than expected.

• MPC meeting, Swedish GDP and ECB meeting feature today.

Market Outlook

0EUR-USD has not managed to advance that much further after yesterday’s price developments, although there was a brief spike to 1.2383 during the Asian session. As it currently stands i.e. while EUR-USD remains above 1.2250, the bias remains on the upside for EUR-USD and the downside for the USD in general. 1.2450-1.2500 is likely on EUR-USD, although the strict technical target related to the recent bottoming formation (basically an inverse head and shoulders) would suggest 1.2650. Selling is likely ahead of this level. A very strong payroll report will be required if there is to be any possible offset to the shift in momentum that has now occurred.

The move has been mirrored in some other USD crosses, particularly USD-CHF, which broke below 1.2700 yesterday, although other currencies like GBP and the JPY have been held back by specific handicaps. In the case of GBP, this relates to the natural hesitancy ahead of today’s MPC outcome, while the threat of Koizumi calling an election after the Upper House vote on postal reform (now delayed until Monday) is hampering the JPY.

The outlook may become a little clearer for GBP today, depending on what kind of message is offered by the MPC (see below). In the absence of some fresh dovishness from the MPC, GBP should actually bounce back a little. The JPY is likely to remain constrained and below 110.75 on USD-JPY is required to introduce a sell signal. If Koizumi does call an election it would cause much uncertainty for the JPY, as few will be confident in the outcome of such a poll or the implications for the Japanese political landscape in general. It could lead to a split in the LDP. If the JPY and GBP can come through these uncertainties, USD weakness may broaden in the short-term.

German manufacturing orders for June were much stronger
than expected, adding to sentiment about stabilising economic
activity in Germany. The chart suggests that the prior weakness
of recent months may have been something of a blip.

Day Ahead
Eurozone –The ECB meeting should see rates being left unchanged and in the press conference there is likely to be an acknowledgement of the stabilisation in some of the data seen over the past month.

UK – the MPC look set to announce a 25bp rate cut today, although what happens to rates during the rest of the year is the bigger issue for market sentiment. Yesterday’s stronger than expected PMI service sector survey contributed to a further pullback in prior rate cut expectations, with the Dec 2005 short sterling future now discounting a 3-mth offered rate of 4.44% compared to 4.28% at the beginning of last week. Looking through the minutes of the July meeting it seems that the major development for most members was the set of GDP revisions presented on June 30, which significantly reduced the q/q growth profile from Q2 last year onwards. The majority were less convinced that the current weakness in the consumer sector would persist.

The issue now is what sort of adjustment in rates is required to deal with the GDP developments, which will inevitably have had a large bearing on MPC thinking about where the economy is compared to growth potential and their new forecasts for GDP and CPI, which will have been prepared for next week’s Inflation Report. In this regard, the market will examine the MPC statement for clues about the likelihood of a further cut in interest rates, particularly ahead of the next Inflation Report. However, much will depend upon how the consumer fares in the months ahead, so the MPC may feel uncomfortable about offering any guidance. Next week’s Inflation Report will also be awaited to see the latest forecast biases.

Sweden – Q2 GDP is due and the market is looking for a pickup in q/q growth after the +0.3% and +0.2% showings in Q1 and Q4 respectively. The last two poor growth outcomes contributed to the easing carried out by the Riksbank in June, although soft employment and CPI profiles were the major factors. If the market expectation of +0.6% is seen today it would be another step in the right direction in terms of stabilising policy expectations. A disappointing number (+0.3% or below) would be negative for the SEK. EUR-SEK has broken below shortterm support at 9.3630 this morning and this move would extend further if 9.3400 also breaks. Back above 9.4040 is required to suggest some near-term upside bias.

Data/event EDT Consensus*

GB MPC rate announcement 07.00 4.50%
SE GDP (Q2) q/q 07.00 +0.6%
EU ECB meeting outcome 07.45, press conf 08.30
US Initial claims (w/e Jul 30) 08.30 316k
US Continuing claims (w/e Jul 23) 08.30 2603k last

Latest data Actual Consensus*
DE Manu orders (Jun) m/m +0.3%
* 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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