The euro remained stuck in tight ranges near the 1.2800 level against the dollar as market participants moved to the sidelines and as speculative positioning of long euro positions remained at record highs, restricting the upside potential of the currency.
The euro has been supported by hawkish ECB comments, the EU commission lifting its growth projections for 2006 and German July orders surprising to the upside. But speculative EUR longs continue to hold the pair back, and keeping the dollar in moderately positive territory on the day however were lingering worries over upside wage pressures, evident in “some districts”.
Evoking similar concerns, Q2 unit labour costs unexpectedly accelerated to 4.9% from 4.2% (vs expectations of 4%). ISM non-manufacturing prices paid however did not reinforce inflation expectations, moderating to 72.4 from 74.8. In fact, non-manufacturing ISM provided yet another reason for scepticism given the near universal softness in sub-indicators, despite the improvement in the headline indicator, which rose to 57 from 54.8 (vs 55.1 exp).
Though the Beige Book hardly presented a pessimistic outlook, not only did growth in 5 or 12 districts slow, but also the Fed noted slowing in mortgage demand, ‘uniformly weak’ real estate and construction and weakness in autos and home-related goods. Weakness related to housing markets has been singled out by the Fed on numerous occasions. Also, the Fed noted little evidence of pass through from energy and metals to consumer goods, which reinforce the argument that inflation remains contained.
Analysts at BNP Paribas however, hold that the slowdown will gather momentum, and once speculative longs are cut back then BNP Paribas analysts see a break upward of 1.30.
Sterling meanwhile remains offered even with the US Beige Book signalling slowing growth. In the case of GBP, three factors are affecting the currency, according to BNP Paribas – weaker economic data, falling oil prices and PM Blair likely to hand over power by June 2007.
The fact that the market has [priced in much of the November rate hike means that GBP is vulnerable to downside surprises in data rather than positive ones. Hence, yesterday’s significant decline in the Nat’wide consumer climate index for Aug together with the fall in the Gfk consumer confidence index pushed GBP further under pressure. We do not believe that these two surveys provide good evidence of the UK consumer side and that they would affect the BoE, but current market positioning means that such negative news will not be currency supportive.
Furthermore, the CBI noted this morning that consumer services firms were feeling the heat of the August hike. In the US, the Beige Book (although signalling moderating growth) provided nothing new for the market. While it once again spoke about the housing sector, in terms of inflation, the Beige Book signalled that wage pressures did exist in “some areas” given the shortage of skilled workers. Cable should howeface strong support at 1.8780 before rebounding.
