Wednesday October 5, 2005 - 12:02:52 GMT
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Mellon Bank Foreign Exchange - https://fx.mellon.com/
Forex: Mellon FX Daily - U.S. EditionKey Points
• USD shies away from highs but looks solid at the moment.
• Fed officials again put hawkish slant on comments.
• European service sector PMIs generally better than expected.
• Non-manufacturing US ISM features today.
D The USD remains fairly close to the levels seen during the course of this week. EUR-USD was soft through the latter half of the US session yesterday, helped by further comments from Fed officials about their concerns about inflation and the likelihood of more monetary tightening. However, EUR-USD swung higher later in the Asian session, aided by a pullback in USD-JPY. Exporter USD sales were cited as driving the latter and there was also talk about a softening of recent Japanese investor interest in foreign assets. Eurozone data was also once again encouraging this morning and this gave EUR-USD some additional support.
continues to look well underpinned but as we have mentioned in recent days, key levels need to be taken out against the EUR in particular to help this move advance to another stage. 1.1868 and 1.1759 are the levels in question and a move through the former would be a very big initial signal. The USD index is also facing up to a key area at 90.50-80. There is a good chance that such levels will be overcome in the short-term, with US interest rate and growth arguments having firmed up further this week. If the Fed is intent on raising rates over the next few months, it will be more positive for the USD if it is occurring in an environment where the data remains solid.
This will avoid any feeling that Fed actions could quickly penalise the growth story in the US, which would be counterproductive for the USD. Indeed, a best case scenario for the USD would be for the funds rate to hit 4.25% in December and there to be no sign at all of economic weakness. This would encourage the market to take rate hike expectations to the next stage i.e. to 4.5-5.0%.
The data has much to prove for the remainder of this year before the market is confident in making that leap and further evidence on the issue will be provided today in the form of the non-manufacturing ISM number. A signal that the USD is pulling away from attempting such a break would be provided by EURUSD
moving above 1.2100 (initial respite would be provided today above 1.1970). Below 112.00-60 would have similar consequences on USD-JPY, while the USD index outlook would also deteriorate short-term if it falls below 88.50-89.00
The US non-manufacturing ISM was strong last month, with the headline index reaching its highest level since April 2004 and the employment component matching the recent cycle highs of 59.6 recorded in February this year.
Data/event EDT Consensus*
US Challenger layoffs (Sep) 10.00 71k last
US ISM non-manu (Sep) 10.00 59.9
US Fed’s Hoenig speaks 12.30
Latest data Actual Consensus*
US ABC consumer conf (w/e Oct 02) -20 -22 last
GB N’wide consumer confidence (Sep) 94 100 last
AU RBA rate announcement 5.50% 5.50%
AU Building approvals (Aug) m/m -8.0% +2.3%
IT PMI services (Sep) 51.7 49.0
FR PMI services (Sep) 54.9 55.0
DE PMI services (Sep) 56.2 54.5
EU PMI services (Sep) 54.7 53.4
GB PMI services (Sep) 55.0 55.0
EU Retail sales (Aug) m/m +0.9% +0.5%
* 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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