There was little reaction in the FX market to the decline in initial unemployment claims of 9,000 Thursday morning, bringing the claims number to 349,000 after revisions. The four-week moving average rose to 365,000, the highest since October 2005.
All eyes turn to the Philly Fed survey (10 am EST - not noon) for the latest evidence on regional manufacturing. The survey will be especially scrutinized for whether the February figure has rebounded to -10 after collapsing to a recessionary -20.9 in January from December’s -1.6. Most notable about the latest plunge is that the -20.9 figure was the worst figure since October 2001, which was a result of the September 2001 attacks. Thus, for the index to post a similar plunge without any acts of terrorism reflects the sudden dip in confidence. The January decline was broad-based, showing -15.2 in new orders from 12 and -1.5 in employment from 3.8. The Philly Fed covers three states, ranging from Eastern Pennsylvania, southern New Jersey and Delaware.
Also at 10 am EST is the index of leading indicators seen flat in Jan following -0.1% and -0.2% in Dec and Nov.
Yesterday’s Fed downgrade of the economy was more substantial than most forecasts, lowering its 2008 gross domestic product (GDP) growth projection to 1.3% to 2.0% from 1.8% to 2.5% made in October and raising its unemployment rate projection to 5.2% to 5.3% from 4.8% to 4.9%. But the Fed’s increase of its inflation forecast to 2.0%-2.2% from 1.7%-1.9% before a subsequent decline in 2009 suggests that a short-term inflation rebound could complicate the Fed’s easing task. Nonetheless, the case has proven that even Fed Chairman Bernanke, a central banker favoring inflation targeting, is ready to slash rates at the expense of above target inflation.
Euro awaits Philly Fed
There was little surprise in the European Commission’s sharp reduction of its 2008 Euro zone growth forecast to 1.8% from 2.2% as it fell in line with forecasts issued by the European Central Bank (ECB), International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD). The EU also raised its inflation outlook to 2.6% from 2.1%. The recent stability in United States and euro zone data as well as in financial markets is gradually giving rise to some economists from altering their outlook in favor of ECB rates remaining unchanged in 2008 from earlier calls for a rate cut. We continue to expect a 60% chance of one rate cut by the ECB later in Q3.
EUR is higher against the dollar and the yen reflecting further improvement in risk appetite. The weekly claims and Philly Fed survey can be instrumental in lifting EUR/USD past the 1.4770 resistance. But we warn that the euro’s gains resulting from weak U.S. data have proven more short-lived than gains resulting from strong Euro zone reports. Resistance remains capped at 1.4810, while support stands at 1.47, backed by 1.4630.
EUR/JPY’s break of the 159 figure remains capped at the 159.50 double top, which coincides with the 38% retracement of the Dec 28 high to the Jan 22 low. A Philly Fed reading worse than -10 is likely to drag down the cross pair towards 158.70 and 158.40.
Sterling lifted by sales rebound
We do not regard sterling’s post-retail sales rebound to be sustainable because the stronger than expected 0.8% may be largely a reflection of post-holiday sales using gift cards rather than a positive correction in consumer spending. A similar phenomenon occurred in U.S. January retail sales for this year and 2007. We continue to expect three more rate cuts to 4.50%. A negative U.S. data showing may further prop GBP/USD to 1.9635-40. Support climbs towards 1.9560, followed by 1.9520.
USD/JPY remains vulnerable
The continued struggle of USD/JPY to chart any meaningful gains past 108.30 is proving to be a reflection of dollar weakness rather than yen strength as the rest of yen crosses remains robust. The weekly jobless claims will reinforce the 108.30 resistance unless we see an improvement above -5 in the Philly Fed. We see interim support at 107.80, followed by 107.60. Upside remains capped at 108.20, followed by 108.60.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
