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- British Pound Dives as BOE Unexpectedly Expands Quantitative Easing Program by £50 Billion
- Euro Mixed As European Central Bank Strikes Decidedly Neutral Tone
- Canadian Dollar Down Ahead of Canadian Employment Report
US Dollar Gains as Sentiment Remains Uneasy Ahead of Friday's US NFP Report
The US dollar was the strongest of the majors on Thursday as the DXY index bounced from support at 77.50 and the markets generally remained in consolidation mode. More severe moves were seen in GBPUSD, though, following the Bank of England's announcement that they would be expanding their quantitative easing program, as the pair tumbled over 200 points before finding support at 1.6770. This week's big event risk for the US dollar comes on Friday at 8:30 ET when US non-farm payrolls (NFPs) is forecasted to show job losses for the nineteenth straight month in July, though the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to decline by 328,000, but based on the improvements we've seen in leading indicators like initial and continuing jobless claims, ADP employment, and the employment component of ISM manufacturing, we expect that NFPs may prove to be better than consensus forecasts are calling for.
That said, the steady accumulation of job losses does not bode well for economic growth going forward and indicates that the unemployment rate will continue to climb, albeit at a slower pace. In fact, the July reading of the rate is projected to rise to 9.6 percent, the highest since June 1983, from 9.5 percent. Meanwhile, preliminary estimates of Q2 GDP for the US have shown a 1.2 percent drop in personal consumption, after it rose 0.6 percent in Q1 and contracted by more than 3 percent during each of the previous two quarters, suggesting that the trend in spending remains negative amidst bleak employment prospects and falling incomes.
Intraday US dollar moves will be a bit more short-sighted than that, though, as the currency is likely to only respond dramatically to a surprising result, even if it still shows that the labor market is deteriorating further. That said, with leading indicators showing that the NFPs could reflect an improvement, we need to keep what happened on June 5 in mind. Indeed, on this date, NFPs had been forecasted to plunge by 520,000, but instead, they dropped by 345,000 and sent the US dollar surging, which was unusual because that greenback had generally been gaining only when economic news was disappointing due to market-wide flight-to-safety. Now, we're still seeing a fairly strong link between the US dollar and risk trends, but if NFPs fall by much less than 328,000, a rally in the US currency could lead EUR/USD below immediate support toward the confluence of the 50 SMA and rising trendline support at 1.4080/1.4100. On the other hand, results in line with expectations could keep EUR/USD range bound between former resistance points at 1.4340 and 1.4435, or perhaps lead the pair to break higher.
British Pound Dives as BOE Unexpectedly Expands Quantitative Easing Program by £50 Billion
The Bank of England (BOE) left their Bank Rate unchanged at 0.50 percent today, as expected, but the market-moving part of the announcement came from the Monetary Policy Committee's (MPC) decision to expand their quantitative easing (QE) program. Indeed, the British pound fell sharply across the majors and ended the day down over 1 percent against the greenback after Chancellor of the Exchequer Alistair Darling approved a £25 billion increase to the limit on purchases that the BOE may make via the Asset Purchase Facility, bringing the ceiling up to £175 billion and leading the central bank to declare that they would expand purchases by another £50 billion.
As we mentioned yesterday, recent financial data had suggested that greater intervention was possible after lending to non-financial corporations fell a record £14.7 billion during Q2 compared to Q1 and as the annual rate of M4 money supply growth (excluding intermediate Offshore Financial Centers) fell 0.7 percentage points to 3.1 percent in Q2, all of which suggested that the central bank's £125 billion worth of asset purchases haven't had the desired effects of boosting money supply and increasing lending. Another thing we noted yesterday was that this very evidence may indicate that the level of asset purchases that the UK Treasury and BOE have been willing to commit to will never have the desired effect, making the expansion to the program a very risky bet.
Euro Mixed As European Central Bank Strikes Decidedly Neutral Tone
The euro ended the day on a mixed note once again on Thursday, falling against the US dollar but gaining versus the Britsih pound after the European Central Bank left rates steady at 1 percent, as expected, with ECB President Jean-Claude Trichet stating that rates are appropriate as the pace of economic contraction is clearly slowing. Trichet also said that the overall mood is a little better than before, and that the central bank didn't discuss whether rates were at their lowest level. Beyond that, there were few new insights on the outlook as the ECB will not publish revised forecasts until their next meeting. According to previous outlooks, the central bank predicts that the Euro-zone economy will contract 4.6 percent this year and 0.3 percent in 2010, while inflation will average about 0.3 percent this year and 1 percent in 2010. That said, with the ECB's neutral tone suggesting that they will not expand their €60 billion covered bond buying program, and with the BOE adding to their QE program, there appears to be fundamental upside potential for EURGBP. When it comes to EURUSD, though, traders must keep in mind the US dollar's link with risk trends and be wary of the possibly market-moving release of US non-farm payrolls on Friday.
Canadian Dollar Down Ahead of Canadian Employment Report
The Canadian dollar came under further pressure on Thursday, but truly market-moving data won't be released for the currency until Friday. Tomorrow at 7:00 ET the Canadian net employment change may show a decline of 15,000 during July following a drop of 7,400 in June, while the unemployment rate is anticipated to have risen to match the January 1998 high of 8.8 percent from 8.6 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.
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Written by: Terri Belkas, Currency Strategist for DailyFX.com