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Dollar Tanks on Weak US Data

DailyFX Forex Fundamentals 08-13-04

By Kathy Lien, Chief Fundamental Strategist

∑ Dollar Tanks on Weak US Data
∑ Shockingly Lackluster Q2 GDP Growth In Japan
∑ Slower Inflation in France and Softer Eurozone Q2 GDP


The euro rallied close to 200 pips today as the trend of weak data from the US continues. The conflicting message that the Federal Reserve and economic data are portraying has certainly baffled the markets. However, based upon todayís price action, the market appears to be putting stronger credence to the evidence that they seeing instead of the overly optimistic outlook from central bankers (more on the data in USDCHF section). The Eurozone itself is not fairing very well, but at this point, it should not be a shock that the euro has barely budged on slower inflation in France and weaker second quarter GDP growth in the Eurozone. The flash Q2 estimate increased 0.5% compared to the marketís expectation for 0.6%. Given yesterdayís stronger GDP reports from Germany and France, we know that growth in the big three (plus Italy) has been decent. The shortfall was a result of a contraction in the Netherlands and Greece. Generally speaking, the growth in the Eurozone has come primarily from strong foreign demand. This is really important because if the weaker growth in US and possibly in Japan (based solely upon the disappointing Q2 GDP report) persists, the recovery in the Eurozone could be at risk. The ECB is really stuck between a rock and a hard place. Based upon the economic data from the region, the ECB really does not have the option to raise rates, however, on the other hand, they are faced with rising inflation pressures as a result of soaring oil prices.


These days we are continually questioning what the justifications are for the higher consensus estimates. The University of Michigan Consumer Confidence report was released at 94 this morning, quite a bit below the marketís forecast for confidence to increase to 97.2. With a slowdown in hiring, gasoline prices taking a toll on the pocketbooks of consumers, and weak GDP growth, it would only be logical for consumers to be more pessimistic than optimistic. Not only are drivers paying more at the pump, their gas and electricity bills have also increased as a result of higher energy prices. In addition to weaker consumer confidence, producer prices also increased a less than expected 0.1% last month, while the trade balance for the month of June widened to a record -$55.8bln. Exports decreased 4.3%, while imports increased 3.3%. This will certainly hurt the revisions to Q2 GDP. However, the rally in the euro has become very extended in the past week, so we would not be surprised to see some profit taking at current levels.


The British pound is just riding the dollar bear wave today as it rallies towards the top of its recent range. Traders should be wary of forgetting the recent negative data that we have seen from the United Kingdom. Next week should be no different. We start off Monday with the RICS house price balance. In the month of June, the RICS survey fell sharply from 44 to 17. Given the harsh warning by the Bank of England of a sharp deceleration in house prices, consensus estimates are for a further decline to 10. The only other release from the UK is retail sales on Thursday, which is also expected to dabble into negative territory. Although the BoE Inflation Report has given us plenty of insight into the central bankís updated outlook, on Wednesday, we are expecting the minutes from the monetary policy meeting earlier this month. It will be interesting to see how many members may have voted in favor of keeping rates unchanged, if any at all. Either way, it should confirm that the end of the UKís glorious tightening cycle is in sight.


The Japanese yen plummeted against the dollar in Asian trading following the release of a shockingly weak second quarter GDP report. The market had expected Q2 GDP to increase 1.0%, however to the disbelief of many, GDP rose a paltry 0.4%. On an annualized basis, GDP increased 1.7%, which was sharply lower than the marketís 4.2% estimate. The weakness was a result of weak capital spending and comes in complete contrast to the ongoing economic upturn and rising machinery orders. However, it is still too early to call an end to Japanís stellar growth based upon one set of data. Companies could be slowing down spending as higher oil prices hurt corporate profits and increase input costs.


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