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Wednesday January 31, 2007 - 11:35:05 GMT
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Forex: Mellon FX Daily - U.S. Edition

Mellon FX Daily
06:10 EST Wednesday, January 31, 2007

Key Points
• USD upside favoured against EUR and GBP.
• JPY shows some corrective potential, but basic negative arguments are likely to remain.
• German data strong, Eurozone mixed.
• FOMC meeting, US GDP, Chicago PMI, ADP employment feature today.

Market Outlook

The USD has been reasonably firm overnight, with the market eyeing a more upbeat statement from the FOMC as well as the increasing probability of more solid data news during the remainder of this week. This would be consistent with the generally stronger than expected outcomes in almost all releases in recent weeks. Such a performance may just be related to unusually mild weather confusing the seasonal adjustment process, but until this is proven the market is likely to view such developments in a favourable light as far as the USD is concerned. A stronger USD remains the most likely scenario in the short term unless this week’s US events unearth any bad news (FOMC is amongst today’s highlights – see below for preview).

UK consumer confidence released this morning showed some resilience, but GBP continues to suffer some corrective pressure and this could extend a little further in the short-term. However, 0.6650 is likely to remain intact on EUR-GBP. Support on cable is at 1.9450-1.9500. 1.2860 is key support on EUR-USD.

Data this morning out of the Eurozone has been slightly mixed and has had little impact on ECB rate expectations. German retail sales (typically volatile) and labour market numbers were strong, while Eurozone sentiment indicators were solid but below expectations. Eurozone CPI was also weaker than the original consensus, although this was not of any great surprise after yesterday’s German CPI showed that very little of the VAT rise had been passed on just yet.

Many currencies have been unable to push on against the JPY over the past 48 hours and this loss of momentum has led to some position adjustment. The latest comments from Germany yesterday that EUR-JPY will be discussed at the Feb 9 G7 meeting and that JPY weakness over the last three years was significant for European carmakers, suggests that the market will remain wary until this meeting is over. There is a general belief (which we subscribe to) that unless Japan raises rates or formally complains about a weak JPY (so far they have shown no real desire to do this) the weak JPY backdrop will remain firmly in place. However, if there is a sense that the JPY may stay on hold until this meeting is out of the way, this in itself may be enough to lead some into booking profits so there is some corrective risk in the short-term. This would not get serious on USD-JPY unless the 119.75-120.20 area breaks. Overall, USDJPY upside remains favoured over the coming month, with 124- 125 likely. Key levels on EUR-JPY are at 155.80 and 153.70.

Day Ahead
US – the FOMC announcement is today’s highlight and after the recent flow of data they will probably advance a slightly more upbeat account of recent developments in economic activity. On inflation there have been two core CPI numbers since the last FOMC meeting (Nov at 0.0% and Dec at +0.2%), so the data is mildly encouraging without being soft enough to warrant the Fed announcing an all-clear. Overall, the upside bias to price risks looks like being maintained and it seems unlikely that the statement will significantly alter market expectations about policy. As the Fed will no doubt point out, how the data develops will remain of the utmost significance and this is why market focus will primarily remain on tomorrow’s ISM and core PCE prices and Friday’s payrolls.

Today also sees the release of the 1st estimate of Q4 GDP, Chicago PMI and ADP employment. Q4 GDP could be seen as being slightly out of date already, given other recent data improvements, but it could generate some market action if well away from expectations. The market is expecting a rebound after the soft Q3 number. Chicago PMI is erratic but may still influence market thinking ahead of tomorrow’s ISM manufacturing number. The ADP employment estimate is also released today, although after last month’s disaster (it was very weak compared to the strength in actual payrolls), the market will no doubt pay less attention to it.

Data/event EDT Consensus*

US Mortgage apps – purchases w/w 07.00 -8.4% last
US ADP employment (Jan) 08.15 +125k
US GDP (Q4, 1st est) saar 08.30 +3.0%
US Core PCE prices (Q4) saar 08.30 +2.2% last
US Employment cost index (Q4) q/q 08.30 +1.0%
CA GDP (Nov) m/m 08.30 +0.3%
US Chicago PMI (Jan) 10.00 52.2
US FOMC meeting outcome 14.15 unch
CN PMI manu (Jan) 19.00 54.8 last

Latest data Actual Consensus*
NZ Trade balance (Dec) -NZ$0.4bn -NZ$0.4bn
US ABC consumer conf (w/e Jan 28) -3 -3 last
FR Unemployment rate (Dec) 8.6% 8.7%
FR ILO job seekers (Dec) m/m -22k -20k
AU Private sector credit (Dec) m/m +0.9% +1.0%
JP Housing starts (Dec) y/y +10.2% +9.3%
DE Retail sales (Dec) m/m +2.4% +1.2%
FR Consumer confidence (Jan) -24 -25
DE Unemployment (Dec) -106k -40k
DE Employment (Nov) +43k +51kR last
EU CPI (Jan, flash est) y/y +1.9% +2.1%
EU Econ sentiment (Jan) 109.2 109.8
EU Business climate index (Jan) 1.40 1.50
EU Unemployment rate (Dec) 7.5% 7.6%
GB Consumer confidence (Jan) -7 -9
CH KOF indicator (Jan) 1.71 1.54
* 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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