The relief rally the US dollar received was short lived following the compromise between Democrats and Republicans to increase the US debt ceiling. All of the majors are higher versus the USD with equity markets also posting solid gains. Given last week’s poor Q2 GDP report traders may be positioning for another round of quantitative easing from the Fed though the bar for additional easing remains high.
Traders took only a short pause in their dollar selling while market players continue to move into the safe haven currencies as the threat of a US credit rating downgrade by S&P looms and European peripheral bond spreads remain elevated. The USD/CHF is within striking distance of Friday’s low and the yen has rebounded from this morning’s initial spike higher to 78 in the USD/JPY. The overnight high coincides with a 50% retracement of the downtrend that began on July 20th. While intervention in the forex market by the Japanese Ministry of Finance remains a possibility the most recent CFTC data of the International Money Market shows speculators have increased their long yen positions to a level last seen in March (see chart below), a signal that hints at a reversal in the value of the USD/JPY.
Asian and European equities were higher following the compromise over the US debt ceiling and data from China. Chinese manufacturing PMI was better than expected at 50.7 on expectations of 50.2 but the indicator declined from its previous reading of 50.9. This hints at a slowdown in the Chinese economy but deflects the hard landing scenario some analysts are calling for.
British manufacturing PMI came in below expectations at 49.1 on consensus forecasts of 51.1. A reading below the 50 boom/bust level suggests a contraction in economic growth. This is the fifth consecutive month the survey has failed to meet expectations. The continued drop in manufacturing PMI suggests today’s results are not a case of one off irregularities due to Japanese supply constraints but rather structural problems in the UK manufacturing sector. In the crosses sterling is trading on its lows for the day but cable has still managed to eke out gains versus. Appreciation in the GBP/USD should be contributed to fundamental dollar weakness rather than sterling strength. The pair has resistance at 1.6550 and support at 1.6260. EUR/GBP has resistance at 0.8870 from the falling trend line off of the July high. Support is located at 0.8700.
Last Friday’s disappointing Q2 US GDP of 1.3% was well below expectations of 1.7% and suggests the US economy continues to struggle despite ultra-loose monetary policy. Cyclical unemployment also has drag with the unemployment rate standing at 9.2%. The next major update to the US economic picture comes on Friday with the non-farm payrolls report. Traders may be selling dollars in anticipation of QE3 but the bar for additional Fed action remains high. Despite the gains seen on Friday and today the EUR/USD has traded sideways over the past 10-weeks. EUR/USD resistance is found at 1.4440 followed by last week’s high at 1.4540 and 1.4580. A break here would likely shift the technical picture in favor of the euro. To the downside support comes in at 1.4320-40.
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