At 9:45:00 AM US Oct Univ of Michigan Sentiment Final (exp 82.7, prev 83.4) At 10:00:00 AM US Sept New Home Sales (exp 854k, prev 898k)
The dollar held onto key levels against the majors and steadied in Friday's morning as traders looked ahead to Wall Streets performance for direction. Both the euro and yen attempted to break through short-term resistance around 89.40 cents and 122.40 yen but failed. GBP/USD also tested overnight highs around 1.4330 following better than expected Q3 GDP data, but traders weren't prepared to bet against the dollar, yet.
Today's final revision in the University of Michigan confidence survey is not expected to have much effect on markets. Forecasts call for a further fall to 82.7 from a preliminary 83.4. This would still be above the final September reading of 81.8. However, the initial reading was for 83.6. Still, the index is down about 10 points from 91.5 in August, putting sentiment at its weakest level since 1993. A lower than forecasted fall would spell trouble for consumer spending, the lifeblood of the struggling US economy. Today's Q3 earnings reports, like on Monday, are not seen moving the market considerably. Both Dow and Nasdaq futures are in negative territory.
On Thursday, the wild one-cent swing in EUR/USD from 88.80 to 89.80 caused some consternation amongst traders who had eagerly shorted the euro following the European Central Bank's decision to keep rates unchanged. The euro's recovery from weak US payroll figures and durable goods orders was not to last though. Wall Street staged a comeback with the Dow climbing 1.25 percent to its strongest finish since September 10. US equities rallied because the prevailing sentiment is still for a strong economic recovery next year. Moreover, much of the negative news is already expected and the dollar could therefore test higher in coming months as long as capital inflows continue.
However, markets may have become overly optimistic about the outlook for the US economy since most economic indicators are still showing weak economic signals. Next week's data from the US is expected to show a preliminary contraction in Q3 GDP of 0.9% along with further falls in manufacturing. This is likely to weigh on the dollar, as it would indicate that the economy is one step away from an actual recession, thereby causing the current optimism to fade. But, even though the euro area is expected to avoid falling into recession next year, it doesn't necessarily mean the euro will rise.
In the near-term, growth concerns will remain in focus, not interest rates. Traders rewarded sterling following today's better than expected Q3 GDP data, sending GBP/USD to a week's high of 1.4337. The economy rose at a 2.2% rate when expectations were for a 2.0% y/y rise. The strong UK growth was a surprise, but markets expect the UK to outperform this year. Therefore, even though growth was above expectations, the Bank of England may choose to lower rates anyway because the MPC is more focused on forward-looking data and the strength of the world economy. Moreover, this week's business confidence data from UK manufacturers plummeted to its lowest in three years in October, which prompted the CBI to call for a 50 bp cut from the Bank of England. Other advocates for more rate cuts include certain members of the Bank of England. MPC officials on the whole remain focused on the external threat to UK growth. GBP/USD trading above 1.43. Support seen at 1.4250, with resistance at in the 1.4330 area.
USD/CHF hovered around support at 1.65 in European trade. Today, Swiss National Bank Vice-Chairman Gehrig said he was happy with current levels of exchange rates and that the appreciation seen as a consequence of generalized risk aversion after September 11 has been corrected. But Gehrig did not comment directly on the future direction of Swiss interest rates, only saying the SNB hoped to steer monetary conditions in the coming months in a way that would keep the outlook for price stability intact. On Thursday the government cut its forecast for Swiss growth to 1.6% in 2001 from 1.8% and to 1.3% in 2002 from its original 2.0%.