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The following table shows that it was a mixed week for the U.S. dollar but aside from the
losses in the Japanese yen (and strength for USD/JPY), the greenback ended the week
unchanged to lower against most of the major currencies.
Meanwhile investors were left scratching their heads after the U.S. dollar rose to a fresh
one-month high against the Japanese yen on the back of non-farm payrolls. The jobs report
missed expectations with payrolls rising only 151K, wage growth slowing to 0.1% and the
unemployment rate holding steady at 4.9% in the month of August. From all angles this
report should have taken the dollar lower but instead it ended Friday with broad based
gains. Looking at these numbers the Federal Reserve has a flimsy case for tightening in
September and a hike in December remains in doubt but the rise in the dollar reflects more
complex thinking.
Taking a look at the Fed Fund futures contracts, the market is now pricing in a marginally
lower chance of a rate hike in September (32% vs. 34% from Thursday) and December (59%
vs. 59.8), showing that expectations for a rate hike this year did not change much after the
payrolls report. U.S. stocks moved higher, which is consistent with no immediate tightening
but Treasury yields rose, which is the primary explanation for the dollar’s reversal. Even
though USD/JPY rose from 102 to 104 over the past week, most investors never believed
BRITISH POUND
Data Review
Manufacturing PMI 53.3 vs. 49 Expected
Data Preview
PMI Services - Potential for upside surprise given sharp rise in PMI manufacturing
and higher GfK
Industrial and Manufacturing Production- Potential for upside surprise given sharp
rise in PMI manufacturing
Trade Balance - Likely to be Weaker Give sharp drop in PMI manufacturing
Key Levels - GBP/USD
Support 1.3000
Resistance 1.3300
The U.K. economy and the U.K. currency proved to be extremely resilient this past week.
The biggest surprise was the manufacturing PMI report which rose to its strongest level
since October 2015. The decline of the currency post Brexit played an important role in
supporting export activity and helping the economy weather post Brexit uncertainty. In
addition to new orders, consumer goods also saw healthy demand with consumption
improving since Britons decided to leave the European Union in June. Cable shorts have
been squeezed mercilessly as a result because most investors were positioned for economic
Armageddon. While Prime Minister May said they don’t see a need to consult Parliament on
Article 50, her opposition to “Leave” suggests that they will opt for the mildest form of
Brexit possible, satisfying only the minimum of requests made by voters. The U.K. won’t
remain in this state of “uncertain bliss” forever but there will be a period of calm before
Article 50 is invoked. Looking ahead, the U.K. PMI Services, industrial production and trade
balance reports are scheduled for release. We are optimistic especially after last week’s
healthy PMI manufacturing report and rise in the GfK consumer confidence index.
Data Preview
Markit German and EZ PMI services and composite- Revisions are difficult to predict
but can be market moving
Eurozone Retail sales- Potential for upside surprise given strong rise in German
spending, better French numbers
EZ GDP- Potential for downside surprise given weaker German GDP and unchanged
growth in France
ECB Rate Decisions – Draghi Could be Dovish, Economic Projections will be Released
GER Trade and Current Account Balance- Potential for Weakness Given Lower PMI
Speaking of rate decisions, the European Central Bank’s monetary policy announcement is
the most important event risk on the calendar next week. While no immediate changes in
monetary policy is expected, ECB President Draghi is expected to remind investors that
inflation is low, the economy is weak and easier monetary policy may be needed. Consumer
spending has been particularly soft, manufacturing and trade activity took a hit after Brexit
and most importantly, inflation remains well below target with year over year core CPI
growth slipping to 0.8% from 0.9% in August. Aside from the decision on rates and Draghi’s
press conference, the central bank will also release its economic projections and if changes
are made, they will likely be euro negative given the deterioration in manufacturing and
inflation data over the past week. Like many of the major currency pairs, EUR/USD went on
a rollercoaster ride post NFPs but the currency pair ended the week below the 100 and 20-
day moving averages which puts it on track for a move down to 1.1125, where we have the
50 and 200-day SMAs. If this support is broken and EUR/USD also breaches 1.11, 1.1050 will
be next. If 1.1125 holds, EUR/USD could drift up to 1.1215 with the “breakout” of these
moving averages determined the level of ECB dovishness. On a fundamental and technical
basis, the euro should trade lower but the crosses could experience greater losses on a
percentage basis than EUR/USD.