The markets have had time to mull over the tone of the Fed's decision to cut rates by 25bp, and after the initial disappointment with the Dovish tone used by the Fed, the markets have decided that the Fed have said what they expected it to say all along, and US interest rates are unlikely to fall any further. The change in outlook was helped along by US data, with a rise in PCE deflator numbers, plus a steady reading in manufacturing and personal spending numbers, which although on the whole still showed a relatively weak economy, at least didn't show a further slide. The Dollar has strengthened bringing the EUR/USD rate down below 1.55, and has risen particularly strongly against the commodity currencies, as it's strength has brought the price of industrial metal prices lower. The AUD has fallen almost 3c against the USD, and the US Dollar also climbed 1.6% against the Canadian Dollar, as the USD index rose 1% to a 7 week high.
The Pound fell against the Dollar initially in spite of the Purchase Manager's Index (PMI) for manufacturing, which indicated rapidly increasing input and output prices, and when coupled with the BoE comments that the worst of the credit crunch is behind us, make a rate cut next month unlikely. The Pound initially fell to below 1.98 against the US Dollar, but has staged a limited recovery this morning. The Pound has also climbed against the Euro, back to around the 1.28 level as the markets start to look for the timing of the next Eurozone rate cut.
The major release of the day, as always on the first Friday of the month, is the non-farm payrolls. It may take a very negative figure to change the markets view of future Fed actions, so if the numbers come in at the consensus estimate of a 75k fall, it may not hurt the Dollar significantly, but if the figure is much lower than this or the unemployment rate rises over 5.2%, it could shake the markets confidence, and hurt the Dollar.
Before the US takes over we have UK PMI data for construction, and we've already had the Halifax house price survey which has only confirmed previous survey's showing a falling market for house prices. We've already had Eurozone PMI data which shows a slowdown in the Euro economy, and the number is just above the level that indicates a contraction in the sector, which will further add to the Euro's recent dip, leaving the Pound on the front foot.
Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited