Saturday September 4, 2004 - 10:13:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: Limited employment recovery
The US economic data has been slightly weaker than expected, but the overall evidence has been inconclusive. There will, therefore, be further short-term uncertainties over growth and concerns that the economy could falter during the fourth quarter will continue. The payroll report was also not strong enough to dispel doubts over Fed policy in September, but the most likely outcome is another 0.25% rate increase. These factors should help support the dollar, especially with Euro-zone growth uninspiring. The dollar is, however, likely to face tougher conditions in the fourth quarter, especially if consumer spending falters. A renewed increase in oil prices would also unsettle the US currency and increase the market focus on structural weaknesses such as the trade deficit.
US data releases
Non-farm payrolls +144,000 Aug (+73,000 Jul)
Unemployment 5.4% Aug (5.5% Jul)
ISM index manufacturing 59.0 Aug (62.0 Jul)
ISM index services 58.2 Aug (64.8 Jul)
Consumer confidence 98.2 Aug (105.7 Jul)
Jobless claims 362,000 week ending Aug 27 (343,000 prev)
The Euro strengthened back to 1.2220 against the US dollar in a correction from the previous week’s sharp losses, but the Euro was unable to push through this level and it weakened to under 1.21 after the US employment data on Friday. The US data over the week was inconclusive and did not fully answer many of the underlying questions over US economic trends.
The employment report recorded an increase in non-farm payrolls of 144,000 in August. This was close to expectations while the data for the previous two months were revised up by a total of 59,000. The unemployment rate also fell to 5.4% from 5.5%. There will be relief over an improved labour-market performance, but the increase is still not consistent with strong economic growth and doubts over the economy will persist. The ISM index for the manufacturing sector weakened to 59.0 in August from 62.0 the previous month while the services sector index also weakened to 58.2 from 64.8. There was a sharp decline in consumer confidence to 98.2 from 105.7 and the latest sales reports from US companies were also generally disappointing.
There will be further near-term uncertainties over Fed policy and the payroll report has not removed uncertainties. Overall, the Fed is likely to prefer a further tightening to 1.75% in September, although it may then decide on a pause to assess conditions. There is still the risk that the US economy will falter during the fourth quarter, especially if oil prices stay strong, and the Fed would then find it much more difficult to increase rates further.
As expected, the ECB left the repo rate at 2.0%. The ECB was also generally optimistic over economic prospects and warned that it would need to be vigilant over inflationary pressure. The economic data has not supported the ECB’s optimism and expectations of a rate increase this year are likely to remain below 50% for now.
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