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Tuesday August 3, 2004 - 20:09:05 GMT -

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Softer UK economic data solidifies 25bp instead of 50bp rate hike on Thursday

DailyFX Forex Fundamental Report 08-03-04

By Kathy Lien, Chief Strategist of

· Eurozone unemployment remains at 4 ½ year highs
· US consumer spending retrenches to September 2001 lows
· Softer UK economic data solidifies 25bp instead of 50bp rate hike on Thursday


Weaker US economic data failed to provide the euro with enough momentum to shed the 1.20 and adopt the 1.21 handle. Based upon the price action, it appears that those who want to be long euros are already long and either the rest of the market is undecided, on vacation or waiting for opportunities to go short. A break of the technically and psychologically important 1.20 level, could lead to an extended move lower as funds or corporations who have hedges down to 1.20 may now need to renew hedges down to 1.15. Positioning and sentiment seems to be driving the markets in the past few days and not economic releases. Data released from the Eurozone today was right in line with expectations – producer prices remained unchanged in June with an annualized pace of growth of 2.4%. The unemployment rate also remained unchanged at 9%. Unemployment remains a persistent problem in Europe, with German unemployment sitting at 9.8% and French unemployment at 9.4%. If you recall, in the PMI reports released yesterday from the Eurozone, the employment components for Germany, Italy and France were all below 50, indicating that more firms are firing rather than hiring in the 3 largest countries within the Eurozone, which is bad news for the future outlook for the labor market and domestic consumer consumption.


The dollar lost some ground in the wake of weaker personal spending and personal income reports. Although the market had already expected negative growth in personal spending (forecast: -0.1%) after the weak retail sales report for the month of June and consumer spending led decline in the advance Q2 GDP report, they certainly did not expect personal spending to fall by the biggest amount since September 2001. Although the Commerce Department said that the weakness should be temporary, it stems primarily from a fall in auto sales, which tends to be very volatile. The auto sales reports for the month of July released today indicate modest recovery from the sharp dip in sales in June. Ford and GM’s inventories of unsold vehicles have swelled to record levels in recent months. For the month of July, GM reported a 0.3% increase in auto sales, Chrysler reported a 6.3% increase in sales while Ford reported a 4.1% decline in sales. Overall, judging solely based upon July data, consumer spending remains weak. Meanwhile, the Fed’s beloved core PCE deflator, which excludes the more volatile food and oil components, suggests that inflationary pressures have began to stall.


For once, we are seeing softer UK economic data. The Construction PMI report declined from 56.6 in June to 54.2, with an across the board slower pace of grow. However it is also important to point out that the overall index still remains above the key 50 contraction / expansion level and the future business activity component actually increased from 74.4 to 76.6. In terms of retail sales, the Confederation of British Industry (CBI) survey of the retail sales balance fell from 48 to 24. The softer reports released today has some people arguing that we are finally seeing the effects of the Bank of England’s 4 previous rate hikes. Even so, spare capacity still remains tight in the United Kingdom, while house prices continue to increase. This means that the BoE will still need to raise rates on Thursday. Today’s reports should only serve to convert the minority that may have been calling for a more aggressive 50bp rate hike by the central bank.


With the lack of any important economic releases, the dollar continues to extend its grind lower against the yen. Toyota did report a 29% jump in international sales, confirming its role as the world’s most profitable carmaker. Meanwhile in China’s continued quest to relax restrictions on the financial sector, they have recently announced that foreign banks such as Citigroup and HSBC can open more than one branch per year starting on September 1st. The banks also only need to have 300 million yuan in operating capital, down from 400 million yuan. China is rapidly trying to open its markets fully before the expiration of the five year deadline imposed by the World Trade Organization (WTO). With 3 ½ years already having passed since China’s WTO entry, they are expected to step up the pace of relaxation in the months ahead – it should only be a matter of time, when China begins to relax their currency regime.


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