Friday June 2, 2006 - 10:31:48 GMT
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Forex: Mellon FX Daily - U.S. EditionKey Points
â€¢ Strong US employment data required today to prevent further EUR-USD gains in the short-term.
â€¢ Yesterdayâ€™s US data offers significant support for unchanged Fed rates on June 29.
â€¢ EUR crosses favoured in general going into ECB meeting, with 50bp rate hike likely.
bounced back well yesterday off the bottom of the current trading range, helped by weak US data. This should continue today unless there is a very strong employment report. Yesterdayâ€™s data was significant. 1) the weaker ISM survey will be viewed by the Fed as evidence of the moderation in economic activity they are expecting/hoping for. 2) the very weak pending home sales number will also strike a chord given that they have identified the housing market as a key swing factor for consumer spending. Indeed, it is surprising that the July Fed funds future did not give up more of the move seen after the FOMC minutes. It now stands at 5.175% compared to 5.19% after the minutes and 5.15% before the minutes. Yesterdayâ€™s data was more significant for the June 29 Fed decision than the minutes. Mondayâ€™s non-manufacturing ISM will also be significant.
Given the high risk of a 50bp rate hike next week from the ECB â€“ a 50bp move is tentatively favoured over the alternative of moving to more frequent 25bp rate rises â€“ this should also help EUR-USD today, although the upper end of the current range around 1.2885-1.2920 should hold for now. The USD is also likely to weaken against other currencies, although the EUR should be the clear leader. Some key EUR crosses
have been showing strength and this looks like continuing in the short term. One such example is EUR-AUD, which yesterday hit a 14- mth high. There is upside risk on this while above 1.7100-20.
â€“ the employment report is the only real data feature today and the market will naturally be looking for more clues about the likely course of Fed policy in the short-term. However, it will need to be very strong to offset the weak ISM number yesterday, which in many ways is more significant for Fed policy, the labour market being more of a lagging indicator of activity. Something in excess of 220-230k in combination with stronger workweek or earnings figures will be required to truly offset yesterdayâ€™s news.
Data/event EDT Consensus*
US Non-farm payrolls (May) 08.30 +170k
US Unemployment rate (May) 08.30 4.7%
US Average workweek (May) 08.30 33.8
US Hourly earnings (May) m/m 08.30 +0.3%
US Factory orders (Apr) m/m 10.00 -1.5%
Latest data Actual Consensus*
JP Monetary base (May) y/y -15.3% -15.9%
EU PPI (Apr) y/y +5.4% +5.3%
* Consensus unless stated
ï›™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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