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At 7:00:00 AM UK BoE Meeting (exp n/c, prev 4.0%) At 7:45:00 AM E-12 ECB Meeting (exp n/c, prev 3.25%) At 8:30:00 AM US Jobless Claims (exp 375, prev K 362 K) At 10:00:00 AM US June Construction Spending (exp 0.4%, prev -0.7%) US July ISM (exp 55.6, prev 56.2)
The dollar rose sharply in London trade to session highs of 97.26 against the euro and 120.33 yen after breaking through key technical barriers. Another round of disappointing economic data may have helped the dollar higher, but equally poor figures from the US imply that current FX movements are more the result of investors reassessing global growth expectations on the back of a slower than expected US recovery.

EUR/USD fell to a 3-week low of 97.26 after breaking below key support at 97.65. Support is now eyed at the July 5 low of 97.10 which should prove tough to break today. Resistance is seen at 97.65 followed by 98.50 and 98.80, which should contain any reaction off of today's low. Failure to overcome 97.65 would argue for a break of 97.10 targeting 95.80, the 38% retracement of the entire rally from 85.65 to 1.02. This support should stave off any further euro losses in the near term.

Recall that the dollar's rise to near 17-year highs on a trade-weighted basis in February oincided with the market's expectations of rapid economic recovery, which would primarily benefit the US. Then accounting fraud scared investors away from US equities and money poured into the cyclically advantaged countries most likely to benefit from a US-led global recovery. But with risk aversion back on the rise, investors are taking profits and seeking out safe haven assets again. Therefore, given that the euro's sharp 17% rise against the dollar since April was based almost entirely on a disadvantaged dollar, as investors revise downward their expectations of US-led growth, they must also reevaluate the risk that poses to other countries.
European economic data confirmed that a global setback is underway as both Euroarea and UK manufacturing PMI surveys fell in July. E12 fell to 51.6 from 51.8 while the UK July PMI slipped below the key 50 mark to 48.9 from 50.5. The impact on the euro and sterling was minimal as FX dealers had already sold the currencies in anticipation of bad economic data. Euroarea May Retail Sales also showed weakness by rising by 1/3 the expected 1.2% in May at 0.4% m/m. April was downwardly revised to -0.9% from 0.1%), putting y/y growth at 0.7% from 0.8%.
Other data today showed French July Consumer Confidence fell more than expected to -17 from 13. The German Ifo institute also cut its 2002 German GDP outlook to 0.7% from 0.9% and '03 outlook to 2.3% from 2.4%, citing fragile German economy reliant on an uncertain global recovery.
Key US data today will be ISM index of manufacturing activity which is expected to fall to 55.6 from 56.2, but could show a much larger contraction if in line with recent disappoints. Given today's gains in the dollar, a disappointing figure could encourage profit taking.
Of course, just as important as the economic data to the dollar's performance will be the direction Wall Street provides. Indices have gone sideways after a series of sharp gains. This makes today's action very important if there is to be a sustained equity rally. Technically, there is a little more room to the upside in US stocks, and today's futures are pointing higher. But without a fundamental improvement in the US earnings outlook there is no real reason to support the current stock rally, which makes further dollar gains difficult as well. Moreover, barring a substantial rise in foreign capital flows to the US, the dollar remains at risk to fears over the growing current account and fiscal deficits.
As expected, the BoE left interest rates unchanged at 4.0% for the ninth consecutive month as the uncertainties in equity markets and lackluster economic data weigh on the outlook. The bank had been expected to raise rates during the second half of the year to cool down the housing market, which is up 21% y/y in July. The ECB is expected to also keep rates unchanged at 3.25% today due to uncertainties in equity markets and lackluster economic data which also weigh on their outlook.
USD/JPY broke higher from a triangle formation to a session high of 120.33. This is just below its 3-week high of 120.40 and strong selling and rumored option barriers at 120.50 as well as key resistance at 120.75/80 should contain the upside. Support is seen at 119.50, and 119.20, the 62% retracement of 118.45-120.40. A break below 119.20 opens the downside targeting 118.50 ahead of 117.90, with a move below 117.50 putting bigger lows back at risk.
GBP/USD mimicked EUR/USD but broke below a bigger two-week consolidation which had formed a noticeable base at 1.5560. The break here encouraged traders to target 1.55, the 50% retracement of the 1.5140 to 1.5860 rally. Recall, cable formed a double top at 1.5860 which led to the most recent decline. Now, holding above 1.55 is imperative to avoid more selling targeting 1.5410, the 62% retracement of the same rally.