[B]Talking Points
• Japanese Yen: Vice Fin Min Tsuda worries about export slowdown, yen back above 104.00
• Euro: Rethink of FOMC reaction pushed euro back to 1.5500
• Pound: Manufacturing PMI better than expected helps drive EURGBP lower
• US Dollar: ISM Manufacturing on tap[/B]
As most of the world celebrates Labor day the global economic calendar remains barren until the North American session. The euro however, was weak throughout the night as traders reconsidered the initial post FOMC reaction which took the pair for a 100 point upward ride. Although US monetary officials did not explicitly state that they were going to end the easing cycle, the FOMC statement did hint that the committee may be changing its bias from dovish to neutral.
The long term implication of such a shift in policy should favor the dollar, as markets begin to appreciate the fact that most of the monetary adjustment by the Fed has already been made. With most of the rate cuts behind us, the greenback, which has been battered relentlessly due to unfavorable interest rate differentials, may now find some reason to rally.
The euro was also pushed lower by a relatively upbeat Financial Stability Report from BoE that stated that the worst of the credit crisis may be over. Taken together with yesterday’s better than expected US GDP data, this analysis suggests that the US economy may be simply in the midst of a slowdown rather than the full blown recession and if that were the case the dollar may see further strength as traders reassess their doomsday assumptions.
Meanwhile in the UK Manufacturing PMI rose to 51 from 50.8 expected remaining above the 50 boom/bust line for the time being. Growth did slow from the month prior as new orders declined, but businesses continued expand overall. Cable did very little against the dollar, but gained significantly against the euro with EURGBP coming to within 5 points of the 7800 figure during London trade. Part of the strength in the cross was attributed to M&A flows as EDF readies 9 Billion pound acquisition of British energy.
In the US all eyes will turn to tomorrow’s NFP report, but ahead of it, the markets will scrutinize the ISM Manufacturing data due at 14:00 GMT today. Consensus calls for a slightly lower figure, but given the positive read from the Chicago PMI data yesterday, an upside surprise is possible. If the ISM report prints better than 49.0 the 1.5500 level in EURUSD is likely to give way as dollar bulls continue to press the theme that the US economy is in a mere slowdown rather than a full scale recession.
[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]