Japanese data continued to turn sour, adding further evidence to the growing consensus that the world’s second-largest economy is headed for recession. Australian data surprised to the upside as Westpac Consumer Confidence jumped to a 7-month high on falling oil prices and the prospect near-term interest rate cuts. Event risk for the forthcoming session is unlikely to substantially change the existing outlook for European fundamentals. This may open the door for a counter-trend reversal as the US dollar is positioned at significant resistance against the major currencies.
[B][U]Key Overnight Developments[/U]
[/B]
[B]• Japanese economy shrank -2.4% in the second quarter, facing recession
[/B][B]• Australian consumer confidence jumped to 7-month high on rate cuts, falling oil[/B]
[U][B]Critical Levels
[/B][/U]
The Euro oscillated in a wide 53-pip range in overnight trading. DailyFX Chief Strategist Jamie Saettele expects the Euro correct 1.5083 before an eventual decline to 1.4668. Near-term support stands at 1.4814. Sterling traded lower, losing its hold on the 1.90 level. Support is now at 1.8905, with resistance at 1.9082.
[U][B]Asia Session Highlights[/B][/U]
Japanese data continued to turn sour, adding further evidence to the growing consensus that the world’s second-largest economy is headed for recession. Preliminary estimates of the [B]Gross Domestic Product[/B] saw the economy contract -2.4% in the year to the second quarter. A recession is defined as two consecutive quarters of negative economic growth. June’s [B]Trade Balance[/B] saw the surplus shrink more than expected, printing at ¥252.1 billion versus ¥293.6 expected. Exports fell at an annualized rate of -1.5%, the first negative reading in 5 years, as the global slowdown brought waning demand for Japanese products. The external sector had been the last pillar of resilience for the economy, making recession all the more likely.
Australian data surprised to the upside as [B]Westpac Consumer Confidence[/B] jumped to a 7-month high of 9.1% in August. Earlier this week, we wrote that the metric “may correct a bit higher in August as Australians begin to factor in the preceding month’s near-22% drop in crude oil prices.” Signals of near-term easing in borrowing costs at the last meeting of the RBA also helped. Indeed, Westpac chief economist Bill Evans noted that, “We are confident that the two most important variables which influence consumer sentiment are interest rates and petrol prices.” The [B]Wage Cost Index[/B] offered less encouragement, surpassing expectations to print at 4.2% in the three months to June. The reading suggests that high oil prices did spill over into wage growth in the second quarter. On balance, the metric is backward-looking at this point given July’s changes in energy markets.
[U][B]Euro Session: What to Expect[/B][/U]
The economic calendar looks noticeably uneventful in European hours. In the UK, expectations call for an across-the-board deterioration in the employment situation: [B]Jobless Claims[/B] are seen rising in July, as is the [B]ILO Unemployment Rate[/B] in the three months to June; [B]Average Earnings[/B] are seen declining to the lowest in 7 months at 3.7% in the year to the second quarter. The labor market is usually the last part of the economy to show weakness in downturn. Jobs data began to turn south last month and is likely to remain weak in the near term as the UK tries desperately to avoid recession amid a housing slump of historic magnitude. To that effect, traders will pay particular attention to the [B]Bank of England Quarterly Inflation Report[/B] for any downgrades in price level expectations following the fall in crude oil. If inflationary pressure begins to moderate, the BOE may see scope to support growth with an interest rate cut.
Euro-Zone [B]Industrial Production[/B] is expected to improve, returning to positive territory at 0.2% in the year to June. Although French and Italian production readings declined in the same period, an improvement in Germany can prove enough to take the number higher. Germany boasts the largest industrial sector of the top economies in the 15-nation bloc.
On balance, the scheduled releases are unlikely to substantially change the present outlook for European fundamentals. This may open the door for a counter-trend reversal as the US dollar is positioned at significant resistance against the major currencies.
[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]