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- Euro Breaks 2009 Highs Amidst Stronger Data, Improved Investor Sentiment
- British Pound Rallies as UK Manufacturing PMI Reaches 1-Year High, Opens Door to Test of 1.75
- Australian Dollar Could Rally for Test of 0.85 If RBA Leaves Rates at 3.00%, Signals Hawkish Bias

US Dollar, Japanese Yen Tumble as Strong Manufacturing Reports Signal Broad Global Recovery
Manufacturing indices from Europe and the US spurred confidence that a broad recovery in growth is in the works, sending FX carry trades and equities higher and leading the US dollar and Japanese yen lower. Indeed, the US ISM manufacturing index rose more than anticipated to a nearly one-year high of 48.9 in July from 44.8, and a breakdown shows that the subcomponents of the report were even more impressive, as production, new orders, and new export orders showed a clear increase in growth, with the latter two hitting the highest levels since June and July 2007. While the employment component did increase as well, it signaled job losses for the twelfth straight month, and suggests that this Friday's non-farm payrolls report will also indicate that employment levels fell yet again during July, albeit at a slower pace than in previous months.

Upcoming income and consumption data for the US is projected to reflect mixed signals on the economy. First, personal income in anticipated to fall by 1.0 percent for the month of June, which would mark the sharpest drop since August 2005. That said, past increases in income have been due purely to surging transfer payments, which include government benefits like unemployment, while wage and salary growth has fallen steadily (-1.1 percent in May from a year ago). Next, personal spending is forecasted to rise by 0.3 percent for the second straight month in June, but based on the steep declines we saw in consumer confidence during that period, this reading could be somewhat disappointing. If this is indeed the case, the US dollar could gain slightly on flight-to-safety. On the other hand, surprisingly strong results could hammer the currency even lower as carry trade demand rises.

Related Article: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Breaks 2009 Highs Amidst Stronger Data, Improved Investor Sentiment
The euro gained traction across many of the majors on Monday, gaining more than 1 percent against the US dollar and Japanese yen as risk appetite increased and as Euro-zone manufacturing PMI for the month of July was revised higher. Indeed, PMI was revised up to a nearly one-year high of 46.3 in July from previous estimates of 46.0 and from 42.6 in June, suggesting that the sector continues to see signs of recovery. On the other hand, German retail sales for the month of June unexpectedly slumped 1.8 percent, suggesting that any improvements in demand for European goods may be due to foreign demand, rather than domestic demand. All told, the EUR/USD break above the former 2009 high of 1.4340 creates potential for additional gains, with 1.4600 (61.8% fib of 1.6036-1.2328, weekly/monthly pivot point) offering the next solid level of resistance.

Related Article: Euro Weekly Trading Forecast

British Pound Rallies as UK Manufacturing PMI Reaches 1-Year High, Opens Door to Test of 1.75
The British pound was the strongest of the majors on Monday, rallying nearly 2 percent against the Japanese yen and over 1 percent versus the US dollar, as UK economic data was surprisingly strong. UK manufacturing PMI jumped to match the April 2008 high of 50.8 in July from 47.4, but the important part of this was that the index finally rose above 50, which is the point of neutrality, to finally signal an expansion in activity. The data suggests that domestic and foreign demand for manufactured goods in the UK is finally picking up and could eventually help lift the nation out of recession. Looking to GBP/USD, the pair broke above the 2009 highs near 1.6750, and now that the hurdle has been cleared, the door may be open for a further rally toward former support at 1.7500. That said, 60 minute and 240 minute RSI were in overbought territory at the d of the US trading session, and daily RSI was getting very close to those levels as well, suggesting the pair could see a period of consolidation in the near-term.

Related Article: British Pound Weekly Trading Forecast

Australian Dollar Could Rally for Test of 0.85 If RBA Leaves Rates at 3.00%, Signals Hawkish Bias
That Australian dollar made solid headway against the US dollar and Japanese yen on Monday, but fell against the rest of the majors as demand for the euro and British pound surged. The currency faces event risk overnight as the Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged at 00:30 ET for the fourth straight month at 3.00 percent, and the Australian dollar may only respond to a biased monetary policy statement. As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in 137 basis points worth of rate increases by the RBA over the next 12 months as economic data has shown slight improvements and RBA Governor Glenn Stevens issued somewhat hawkish comments, saying that they don't have to wait until unemployment is peaking before raising interest rates.

After the central bank's last meeting, RBA Governor Glenn Stevens said that the outlook for inflation allows some scope for further easing of monetary policy, and it will be very important to see if this line is repeated in tonight's policy statement. Indeed, if Stevens does not say it again, OIS will only shift to price in additional rate increases further down the line, which could send AUD/USD up for a test of the 9/22/08 high of 0.8518, and a break above that level opens the door to 0.9000. On the other hand, talk of potential rate cuts or dour assessments of growth or the financial markets could weigh on the currency pair.

Related Article: Australian Dollar Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com