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Saturday August 7, 2004 - 10:39:55 GMT
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Forex: Fed in focus after payroll shock

US dollar confidence has received a serious setback following the weaker than expected employment report and dip in long-term interest rates. The Fed is still likely to increase US interest rates this week, but there will be speculation over a pause in September. The markets will also scale back the timetable for rate convergence between the US and Euro-zone. Volatility will remain a persistent threat during August as liquidity stays low. A combination of Wall Street weakness and high oil prices will increase fears over a shortfall in equity inflows and the impact of a wide current account deficit. Caution is needed over aggressive dollar selling, but further medium-term depreciation is likely.

US data releases

Non-farm employment +32,000 Jul (+78,000 Jun)
Unemployment 5.5% Jul (5.6% Jun)
ISM manufacturing 62.0 Jul (61.1 Jun)
ISM services 64.8 Jul (59.9 Jun)
Jobless claims 336,000 week ending Jul 31 (347,000 prev)

Market analysis

Currency markets were confined to narrow ranges for much of the week before exploding into life on Friday. The markets had been braced for the July employment report and the release sparked heavy dollar losses with a move to a low of 1.2285 from 1.2050 ahead of the release.

The payroll report recorded employment growth of only 32,000 in July compared with expectations of a 228,000 increase. The June figure was revised down to 78,000 from 112,000 and there was also a downward revision to the May figure. The unemployment rate declined to 5.5% from 5.6%, but offered little comfort to the US currency. The other data over the week was generally firm with the ISM services index strengthening to 64.8 in July from 59.9 the previous month. The manufacturing index was also firm with a move to 62.0 from 61.1in June. Significantly, the employment component for the ISM services report weakened to 50.0 from 57.4 the previous month. This pattern tallies with the employment report and suggests that companies are reluctant to hire additional workers even though growth is still firm.

There could be some speculation that rising non-wage costs are deterring employers. It is also potentially significant that there was an acceleration in earnings growth for July. Labour market weakness will tend to sap consumer confidence if there is no near-term recovery.

The Fed is still likely to tighten monetary policy in August with a 0.25% interest rate increase to 1.5%. There will, however, be speculation that the Fed will not tighten in September, especially as political considerations will come into play. Markets are now suggesting a less than 50% chance of a rate hike in September. It is also potentially significant that the reputation of Fed Chairman Greenspan and particularly President Bush could be damaged by the weak employment report.

Oil prices will remain in focus, especially after prices rose to a fresh 21-year high above US$44 p/b during Thursday. There will be concerns that high oil prices will damage the US economy. There will also be further unease over Wall Street as this will bring the substantial US financing requirement into focus.

 

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Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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