US Dollar Consolidation Continues, Japanese Yen Gains as Equities Pull Back

  • British Pound: What to Expect from the Bank of England on Thursday
  • Euro Mixed Ahead of European Central Bank’s Next Rate Decision

US Dollar Consolidation Continues, Japanese Yen Gains as Equities Pull Back
The US dollar continued to consolidate on Wednesday, as the DXY index held to a tight range of 77.45-77.82, while the Japanese yen gained as uneasy risk appetite weighed US equities down. Data showed that conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - deteriorated in July as the Institute for Supply Management index unexpectedly fell to 46.4 from 47.0 as the business activity, new orders, new export orders, and employment components all weakened at a faster pace. This was the tenth straight month that ISM held below 50, signaling a broad contraction in activity, and differs quite a bit from Monday’s ISM manufacturing result, which was actually better than anticipated. Furthermore, factory orders surprisingly rose for the third straight month in June, this time at a rate of 0.4 percent. This deviation between sectors adds to evidence that any sort of US economic recovery may be dependent upon foreign demand for US exports, as domestic demand is likely to remain hindered by rising unemployment through 2009.

Meanwhile, leading indicators for this Friday’s non-farm payroll (NFP) report continue to yield mixed results. First, Challenger, Gray & Christmas said that job cut announcements fell 5.7 percent in July from a year earlier, marking the second straight decline. Next, the ADP employment change fell by the least since October 2008, coming in at -371,000 in July, compared to a revised -463,000 in June. Finally, the employment component of ISM non-manufacturing fell to 41.5 from 43.4, signaling a steeper drop in jobs, while Monday’s release of the employment component of ISM manufacturing rose to 45.6 from 40.7, signaling that the pace of job losses slowed. With a Bloomberg News poll of economists calling for NFPs to drop by 328,000 in July, it looks like the results could generally fall in line with expectations.

Related Article: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast[B]

British Pound: What to Expect from the Bank of England on Thursday[/B]The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement in order to see if the Monetary Policy Committee (MPC) will end their quantitative easing (QE) program, as they suggested in their July 9 policy statement. There is evidence arguing for and against an expansion to the BOE’s QE program, as the central bank has established a target of £125 billion in purchases despite the fact the UK Treasury approved purchases up to £150 billion. First, clues that the central bank may consider buying another £25 billion in assets come from recent lending data published by the BOE, as they said that lending to non-financial corporations fell a record £14.7 billion during Q2 compared to Q1. The BOE also said that the annual rate of M4 money supply growth (excluding intermediate Offshore Financial Centers) fell 0.7 percentage points to 3.1 percent in Q2, all of which suggests that the central bank’s asset purchases haven’t had the desired effects of boosting money supply and increasing lending.

At the same time, this very evidence may indicate that the level of asset purchases that the UK Treasury and BOE have been willing to commit to will never have the desired effect. With the public likely to be outraged at any effort to expand asset purchases beyond the previously approved amount of £150 billion, the data may really just prove that the program has been a failure and not worth pursuing further. That said, if the BOE were to end their asset purchases, they will likely try to shine a more positive light on it, as they can cite recent improvements in UK economic data, such as the rise in the purchasing manager’s indices for the UK manufacturing and services sectors to more than 1-year highs in July and a steady increase in mortgage applications in this year to a 14-month high of 47,584 in June. All told, currency traders have been looking at QE as negative factor for the British pound when it comes to initial announcements, and this sentiment shouldn’t change much when it comes to Thursday’s news.

Related Article: British Pound Strength Hinges Upon BOE’s Stance on Quantitative Easing

Euro Mixed Ahead of European Central Bank’s Next Rate Decision
The euro ended the day on a mixed note on Wednesday, as EURUSD generally held to a range of 1.4370-1.4440. European data was a bit better than anticipated, as the purchasing managers’ index (PMI) for the Euro-zone services sector was revised up to 45.7 in July from initial estimates of 45.6 and from 44.7 in June. This helped bring the composite index, which covers the services and manufacturing sectors, up to an 11-month high of 47.0 from 44.6.

Looking ahead to Thursday, the European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including whether 1 percent should be considered the “floor.” Also, any changes to the economic outlook for the Euro-zone could have a heavy impact on euro trade.

Related Article: EURUSD Monthly Exchange Rate Forecast

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Written by: Terri Belkas, Currency Strategist for
E-mail: <[email protected]>