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• British Pound Rallies Following GDP Revisions, but GBPUSD Fails to Break 1.4350
• Euro Remains in Consolidation - ECB Policy Meeting Could Spark Breakouts Next Week
• Canadian Dollar the Weakest of the Majors Ahead of Monday's Q2 GDP Report
US Dollar Gains in Choppy Trade - U of M Consumer Confidence Rises More Than Expected
The US dollar ended mostly higher on Friday, and true to what we saw throughout much of the week, it was just one large spike over the course of 30 minutes that determined which currencies won and lost. Ultimately, this is indicative of the low volume trading so often associated with the summer doldrums, and this will likely remain the case until at least next week, if not until after Labor Day. Looking to the data on hand, US personal income went unchanged during July, and while wage and salary growth managed to increase 0.1 percent during the month, the annual rate held at -5.1 percent. Personal spending rose by 0.2 percent, but this was due almost exclusively to a rise in auto sales driven by the cash for clunkers program, which formally ended on August 24. Excluding autos, personal spending actually went unchanged, which is probably more indicative of the current consumption environment.
Meanwhile, the final reading of the University of Michigan's consumer confidence index was a bit better than expected and was revised up to 65.7 from an initial estimate of 63.2. That said, this was still down from the July reading of 66.0, which is somewhat surprising in light of the surge in the Conference Board's measure to 54.1 in August from 47.4. The underlying trends within both reports remained the same though, with confidence in the economic outlook leading gains, while sentiment on current economic conditions deteriorated or remained very weak, which was the case with the Conference Board's index.
The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve's last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current policy actions...will contribute to a gradual resumption of sustainable economic growth and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but on the other hand, indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.
On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.
British Pound Rallies Following GDP Revisions, but GBPUSD Fails to Break 1.4350
The British pound was mixed on Friday after GBPUSD rallied for a testing of former support at 1.4350, but subsequently backed down. UK economic data was slightly better than forecasted, as the preliminary reading of Q2 GDP was revised up to -0.7 percent from -0.8 percent, while the annual rate was revised to -5.5 percent from -5.6 percent, though this was still the worst annual decline since recordkeeping began in 1955. A breakdown of the report showed that revisions were due to manufacturing, energy extraction and wholesale and motor vehicle services, improvements that were partly the result of a government scrappage program that offered subsidies to consumers who traded in old cars for new ones. On the other hand, consumer spending and investment remained weak at -0.7 percent and -4.5 percent, respectively. While there are still major downside risks for growth in the UK, leading indicators for GDP like PMI services and PMI manufacturing have shown signs of expansion in July. Nevertheless, PMI readings above 50 for the months of August and September would be necessary to indicate a legitimate bounce.
Euro Remains in Consolidation - ECB Policy Meeting Could Spark Breakouts Next Week
Volatile trading left the euro mostly lower against the majors, as EURUSD failed to break yesterday's highs. In economic news, European confidence in the economic outlook increased in August, as was reflected in the German IFO and ZEW survey. Indeed, an index of executive and consumer sentiment in the region rose to 80.6, the highest since October, from 76. The improvements suggest that spending on the part of businesses and consumers should follow suit, though this has not been the case quite yet. Next Week, the European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including whether 1 percent should be considered the floor. That said, the ECB will also be announcing new economic outlooks for the Euro-zone, and if we see any sort of revisions, the euro will likely act accordingly.
Canadian Dollar the Weakest of the Majors Ahead of Monday's Q2 GDP Report
The Canadian dollar and New Zealand dollar were the weakest of the majors on Friday, but it is the former that will face headline event risk at the start of next week. The Canadian economy is projected to have contracted for the third straight month in Q2, this time by 3 percent. Such a result would indicate a moderation in the pace of Canada's decline, as GDP fell 5.39 percent in Q1 and 3.74 percent in Q4 2008. Generally speaking, exports are likely to remain a heavy weight on GDP, as the nation posted a record current account deficit during Q2 after exports fell C$9.3 billion, though this is somewhat better than the drop of C$19.9 billion in Q1. The consumer end of the line has shown more improvement, though, as the Canadian economy only lost 13,300 jobs in Q2, compared to a loss of nearly 273,000 in Q1, while retail sales picked up in May and June. Overall, there is potential for slightly better-than-anticipated result, which would likely offer a boost to the Canadian dollar, but if GDP actually falls by more than 3 percent, hopes that the Canadian economy will be one of the first to emerge from recession may be dashed.
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Written by: Terri Belkas, Currency Strategist for DailyFX.com