Overall strategy
Unless there is a weak monthly employment report on Friday, the US dollar should be able to secure increased yield support which will help cushion the currency from further losses and there is the potential for fragile gains. An overall credit tightening is likely to trigger increased demand for defensive currencies over the next few weeks with greater market caution over carry trades during July and August.
Key events for the forthcoming week
Date | Time (GMT)
| Data release/event |
Friday July 6th | 12:30 | US monthly employment report |
Thursday July 12th | 12:30 | US trade report |
Dollar The US ISM surveys have remained strong for this month and confidence in the economy is liable to strengthen further if there is a firm employment report. Market expectations that interest rates will decline are liable to fade and this should underpin the dollar, especially as bond yields have increased again. High oil prices will maintain inflation fears, but will probably not be a net positive for the dollar. The US currency will still be hampered by fears over mortgage-related difficulties while rallies will be stifled by structural selling.
The dollar was subjected to downward pressure at the end of last week. As confidence deteriorated, the trend continued this week with the US currency weakening to lows beyond 1.3650 against the Euro before a tentative recovery to 1.3580.
The US ISM index for the manufacturing sector increased again to 56.0 for June from 55.0 the previous month with orders and production indices remaining firm.
The services sector index was also robust with an increase to 60.7 in June, the highest level since April 2006.
US 10-year yields fell to the 5.00% level before a recovery back to 5.15% on Friday as expectations over a cut in interest rates faded again after the stronger than expected data.
The ADP employment report recorded an increase of 150,000 for June which increased optimism over a solid payroll report. There were still concerns surrounding the housing sector as pending home sales weakened
Euro
The ECB will maintain a tightening bias on interest rates and will expect to increase interest rates again in September. The euro-zone data has also remained generally firm, but there is the risk of a deterioration over the next few weeks, especially in the consumer and property sectors. The Euro has also priced in further interest rate increases to at least 4.5% by the end of 2007 which will make it difficult to extend gains.
The Euro held firm over the week, but was subjected to some profit taking following Thursday's ECB policy decision given that the currency had been bid higher ahead of the meeting.
The ECB left interest rates on hold at 4.00% following the latest council meeting. In the press conference following the decision, President Trichet stated that the bank would closely monitor inflationary pressure. The comments suggested that the bank will look to increase interest rates in September or October at the latest, especially with Trichet stating that he was not looking to alter market expectations.
The Euro-zone PMI indices remained strong for June in the services sector despite significant variations from individual countries.
The retail sales data was weaker than expected with a 0.5% monthly decline for May which cut annual growth to 0.4%.
There was evidence of some stresses between the ECB and French President over the issue of exchange rate management with the ECB rejecting calls for a more interventionist policy.