Tuesday July 27, 2004 - 21:07:43 GMT
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DailyFX Forex Fundamental Report 07-27-04
DailyFX Forex Fundamental Report 07-27-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Soars On Strong Confidence Report
· German IFO Rises For First Time in 3 Months
· Italian Business Confidence Improves
The market is focused on one thing today, which is confidence and sentiment. In July, we saw the first improvement in 3 months in the current and future outlook of the 7000 companies polled for Germany’s business climate (IFO) survey. The IFO survey increased to a stronger than expected 97.4 from 94.6 in the previous month. The release triggered a 60-pip rally in the euro. Of the four sectors surveyed (manufacturing, construction, wholesale trade and retail trade), sentiment in the manufacturing sector has been solidly in positive territory, while the other sectors have remained in negative territory. The biggest percentage improvement was in wholesale trade, with modest improvements in the retail sector. The willingness of German consumers to spend has been a primary concern for the economy. Today’s IFO report is certainly a move in the right direction and as long as the global recovery continues, consumer consumption in Germany should also increase. In Italy, business confidence also improved for the first time in 3 months from 93.6 to 95 in July as a result of an increase in new orders. However gains in the euro were quickly erased after the US reported its own more impressive confidence report, which rose to the strongest level in 2 years.
After last week’s explosive gains, the dollar resumed its upward course against the majors on the back of an exceptionally robust US consumer confidence report, which improved from an upwardly revised 102.8 to 106.1. An improving labor market and solid home sales has helped to bolster optimism for the fourth consecutive month. The latest rise is a significant improvement since the low of 61.4 made in March 2003. Although there isn’t a clear correlation between confidence and spending, Greenspan’s hawkish testimony last week coupled with today’s indication that the contagion of optimism has also spread to consumers, suggests that the outlook for the US economy remains rosy. Tomorrow, we are going to get more insight into the US economy with the durable goods report and the Fed’s Beige Book. After two months of declines, an increase in defense orders are expected to drive durable goods orders higher in June. The Beige Book report, which is published two Wednesdays before every Federal Reserve Monetary Policy meeting and covers the health of each of the Fed’s regions is expected to show broad based improvements.
The British pound has been unable to escape the bloodbath brought on by the dollar in spite of positive M&A news. On Monday, Banco Santander Central Hispano announced that it plans to acquire Abbey National PLC for GBP8.3Bln. The deal is expected to be a combination of cash and stock, which is positive for the pound and negative for the euro. This would create the world’s tenth largest bank and has already sparked speculation of other possible takeovers of UK banks. Meanwhile mortgage bank lending in the UK increased to a seven year high. Although house prices have recently shown signs of slowing, net lending continues to remain at elevated levels. Tomorrow’s net consumer credit report should provide us with more insight into the high level of consumer indebtedness. We are also expecting the country’s monthly GfK consumer confidence report.
The dollar has surged close to 1% against the Japanese yen today on broad dollar strength. The break above key technical levels in USDJPY distorts the near term outlook for the pair. This evening, we are expecting data from the retail sector. Retail sales are expected to rebound after negative to zero growth in the past four months. Given that the data scheduled for release from Japan this week is expected to be negative, with a forecasted drop in industrial production growth, consumer prices and housing starts, the dollar could register some more near term gains against the yen.
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