Market participants’ assessment of the economic outlook, and of course the direction of monetary policy (the Open Market Committee is holding its next meeting on Tuesday) will probably be influenced by the US labour market figures, which were published today. Beforehand, markets had been bracing themselves for a disappointment. They were particularly worried that the increase in private sector jobs, which had only been moderate as it was, might have ground to a halt, forcing the Fed to resort to more quantitative easing.
Thus the dollar’s slide continued this week: the ICE US Dollar Index Futures fell below its 200- day moving average. By mid-day on Friday, the euro had gained almost 2 cents against the dollar, rising to just under 1.32, and rose to over 1.33 after the release of the US employment data. The dollar also fell against the yen, which climbed to an 8-month high of 85.15. Only the Swiss franc was as weak as the dollar this week. EUR-CHF rose from 1.35 at the end of last week to over 1.38 – despite signs that the SNB was selling some of its bloated foreign currency reserves.
The July US labour market data were indeed disappointing: employment declined by a total of 131,000. Although new jobs in the private sector rose by 71,000, this pales to insignificance compared with the 252,000 job cuts in the public sector, which far outnumbered the Census-related job losses (143,000). The significant downward revision of the June figures by almost 100,000 to –221,000 also had a negative effect. Here the additional job cuts were divided evenly between the public and the private sector.
Nevertheless, we are still not expecting the FOMC to send out any new monetary policy signals on Tuesday. The Fed is likely to maintain its expectations of a moderate recovery with a gradually improving labour market, but is likely to emphasise the risks and uncertainties a bit more than in June. Otherwise, the committee will probably merely reiterate its intention of maintaining its exceptionally expansionary monetary policy for an extended period.
On the whole, we are not expecting the other economic data due to be released next week to bring any unpleasant surprises. The US trade balance deficit will probably have widened again in June, but this information is actually already contained in the Q2 GDP figures. Eurozone Q2 GDP data, released next Friday, could have a positive impact on the euro. Here expectations are quite high, however. And furthermore, not even the ECB’s more hawkish comments have been able to boost the euro much recently.
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