by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The US ISM index for the services sector increased to 49.5 in July from 48.2 previously which was slightly above expectations. The data breakdown was mixed and failed to provide clear direction. The employment component improved, but there was a rise in inventories which will lessen the potential for a sustained recovery in the economy.
As expected, the Federal Reserve held interest rates at 2.00% following the latest FOMC meeting. There was a 10-1 vote with Fisher again dissenting and calling for a hike. The statement was not changed radically from the previous meeting with the Fed uneasy over both growth and inflation aspects. The inflation situation was described as highly uncertain with considerable concern while the labour market had softened further.
Markets will remain sceptical that the Fed will tighten policy this year, but there should not be a substantial shift in interest rate expectations while a favourable Wall Street response will help underpin the dollar.
The latest Euro-zone retail sales data recorded a 3.1% annual decline, the weakest annual reading on record and will maintain fears over the Euro-zone outlook. There were also reports that German GDP fell 1.0% for the second quarter of 2008, although this followed a very strong first-quarter performance.
There will be caution ahead of the ECB policy meeting on Thursday with some further speculation that the central bank will issue stronger warnings over the growth outlook and the dollar consolidated around 1.5460.
As has been the case over the past week, the yen has continued to find support close to 108.30 and, with the US currency generally firmer, the yen advanced on the crosses.
Confidence in high-yield currencies has continued to weaken with the Australian and New Zealand currencies both under further selling pressure. In this environment, there is the risk of capital repatriation back to Japan which will help protect the yen. An overall increase in risk aversion and lower commodity prices will also tend to be net positives for the Japanese currency.
There will still be selling on significant gains as individual investorstarget overseas bonds. Wider Euro losses allowed yen gains to near 167.0 while dollar was again challenging the 108.30 region following the Fed interest rate decision.
The UK drifted weaker against the dollar in early Europe on Tuesday and dipped to 6-week lows around 1.9520 before correcting back to 1.9560. The UK currency found support close to 0.7940 against the Euro and strengthened to 0.7905 in US trading.
TheUK PMI index for the services sector was slightly higher than expected at 47.4 in July from 47.1 previously, but this was still a depressed reading significantly below the 50.0 level.
Manufacturing output fell 0.5% in June while there was a 0.2% dip in industrial production. The data will certainly maintain fears over the UK economy, but should not intensify near-term selling pressure given the amount of deterioration priced in.
Attention will focus on Thursday’s Bank of England interest rate decision with markets not expecting a change in rates, although there will be some caution over Sterling selling ahead of the decision.
The dollar broke above 1.0520 resistance against the Swiss franc on Tuesday, but struggled to gain any momentum and settled close to 1.0540. The Swiss currency again found support close to 1.6350 against the Euro.
Any further decline in commodity prices would tend to reduce near-term demand for the franc on defensive grounds. The franc was, however, broadly resilient in the face of strong equity market gains which suggests that underlying selling pressure has eased for now.
The Australian data remained weak with the services PMI index weakening further to 42.8 in July from 45.6 previously, reinforcing fears over the economic trends after a string of weaker releases surrounding the housing sector.
As expected, the Reserve Bank left interest rates on hold at 7.25% following the latest policy meeting, but the bank statement suggested that it would be looking to cut rates within the next few months.
The switch to an easing bias will reinforce negative Australian currency sentiment in the short term and selling pressure will be fuelled by further losses in commodity prices There was an Australian dollar dip to four-month lows below 0.9150 in US trading.