U.S. weekly jobless claims rose by 16,000 to 317,000 from a revised 301,000. The report exceeded forecasts of 310,000. The four-week average rose to 312.75,000 from 312.25,000. The trend remains well below that of easing cycles, but this may not preclude a rise in the September unemployment rate to 4.8%.
The 10 am release of August factory orders is expected to show a 2.8% decline following a rise of 3.7% and 1.0% in July and June respectively.
Trichet mentions downside risks but remains unequivocally hawkishECB president Trichet neither used the term vigilance to indicate the central bank’s anti-inflation nor described monetary policy as accommodative but this does not alter our assessment that the policy bias remains firmly towards further conditional tightening. The Bank’s message remains clearly hawkish after Trichet noted he expects “inflation to remain significantly above 2% in late ‘07 and early ‘08.” Aside from price pressures, Trichet maintained his hawkishness on monetary developments, which he indicated “need careful monitoring” and “point to upside price risks.”
Trcihet’s acknowledgement of “possible disorderly developments” being a “risk to growth” and his reference to rising “uncertainty on activity outlook” suggests that the central bank will remain watchful of the downside risks to growth, but unless further deterioration occurs in the activity data, the ECB will retain its tightening bias.
On currencies, Trichet reiterated his reference reminding markets of U.S. officials’ mantra on the importance of a strong dollar. Nonetheless, the fact that Trichet has repeatedly stated during the conference the need to counter price risks suggests the central bank may not be ready to abandon the anti-inflation benefits of a strong euro.
Having broken the $1.41 figure, EUR/USD sees interim support at the four-month trend of $1.4080, while a breach below 1.4060 sees support at 1.40010. Key foundation stands at 1.3950. Upside capped at 1.4150.
USD/JPY consolidates below 117 The latest gains in USD/JPY reflect the dollar’s recovery and the yen’s broad weakness with the Japanese currency pulling back even against the struggling euro and sterling. Despite the past two days of U.S. equity losses, USD/JPY displays characteristics of risk aversion and improved U.S. data performance. Despite the recent deterioration in U.S. housing data figures (sales of new and existing homes as well as pending sales), there has been no dampening impact on consumption. Resistance edges up to 116.85, followed by 117.10. Prospects of a pull back would depend on the extent of the decline in U.S. factory orders. Expectations of an overshoot in Friday’s payrolls are expected to keep the pair propped above 116.20. Support starts at 115.80, followed by 115.55.
Sterling edges up after BoEThe Bank of England’s decision to leave rates unchanged at 5.75% has given sterling a brief lift from its $2.0280 lows to $2.0340s. No statement accompanied the decision. Separately, the Halifax house price index fell 0.6% in the month ending in September, posting its first decline since December of last year. The latest figures on mortgage loans and the RICS price index are also serving as the latest empirical evidence against further rate hikes. More importantly, with inflation at 1.8% – well below the 2.0% mandated target – a rate cut should is the next policy move.
We expect a rate cut to take place as early at the November 6 MPC meeting once the BoE has prepared its quarterly inflation report due for release one week after the November MPC announcement. With CPI falling well below the 2.0% target, the BoE inflation report is likely to change its 2-year outlook in favor of price growth meeting the 2.0% target.
Upside is seen capped at $2.0360, with support starting at $2.03330, followed by 2.0280
Ashraf LaidiChief FX AnalystCMC Markets US
