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The dollar traveled an uneven path after the release of Q2 productivity growth posted a better than expected rise. While the greenback regained some strength vs the European majors, the currency remained weak vs the yen. U.S. equities also moved indecisively throughout the day, though the Dow has now rebounded into positive territory.
The eagerly anticipated U.S. productivity figure for the second quarter rose by a meager 1.1%, but the news was well received since markets had been braced for a more pessimistic figure. Moreover, the productivity number looks benign given a soft 1.1% growth in Q2 GDP. The Labor Department also revised Q1 productivity upwards to 8.6% from the previous 8.4% despite an upward revision in unit labor costs to -4.6% from -5.2%. Q2 Labor costs showed the largest increase since Q1 2001, posting a 2.4% rise versus the 4.6% fall in the previous quarter.
Italian ministers are renewing their calls for revising the stability pact after Italian GDP grew by an anemic 0.2% in the second quarter. Q1 GDP was revised to 0.0%, indicating that the Italian economy is seeing static growth thus far this year. Rocco Buttiglione, Italy's European Affairs Minister, suggested that costly reforms and infrastructure investment should be excluded in calculating government budgets. In the editorial section of the monthly ECB bulletin released yesterday, the central bank stressed, It is vital that all member countries maintain a medium-term perspective in compliance with the framework of the Stability and Growth Pact and honour the commitments made to achieve budgets close to balance or in surplus by 2003-04.
EURUSD attempted to breach 97.40 overnight, but has since slid near 97-cents. Support for the pairing is eyed at 96.50/55, the 38% retracement of the 0.8735 to 1.0201 rally. Subsequent floor found at the 96 figure, though further weakness in the euro could bring 95.60 into sight. On the upside, 97.40 should serve as an interim resistance, followed by 97.80, which lies on the downward trend line resistance extending from 1.0065 (July 25) through 99.19 (August 2) A break above this level opens the way to 98.20.
USDJPY has stabilized near 120.10/20 after sliding from a session high of 121.33. The pairing could be headed for the key 120 support, the neckline for the double-top formation on the hourly chart starting from August 6th. Subsequent base for USDJPY lies at 119.50, the 50% retracement of the decline from 125.89 (June 13) to 115.50 (July 16). In the near term, 121.30/40 provides some resistance, just below the 100-week average of 121.50. A close above the moving average will target 122.50, the 50% retracement of the 133.81 to 155.50 decline.
Sterling has been incapacitated against the dollar and the euro lately due to a string of negative data, and worse than expected trade figures released today exerted more pressure on the currency. The trade deficit deteriorated to 3.05 billion pounds in June, considerably wider than the expected 2.1 billion.
Even with the FTSE 100 turning in its best weekly performance since September 2001, cable was unable to capitalize on dollar weakness and barely stays afloat near 1.5240. Further declines in cable faces strong support at 1.52, which is a key resistance level from June-July 2000 on the weekly chart and the 50% retracement of the 1.4535 to 1.5866 move. Continued weakness in sterling could drag the pairing down to 1.5143, the July 2002 low. Resistance is eyed at 1.5310/15, 1.54 and 1.5470.
Next week, markets will be anxiously awaiting the decision of the Federal Open Markets Committee to be held on August 13th. Buoyed by expectations of an interest rate easing by the Fed before the year's end, equities have witnessed a streak of buoyant rallies this week. Morgan Stanley economist Richard Berner asserted on Friday that he expects a 50-basis point cut in the Fed funds rate to 1.25% at Tuesdays' meeting, joining the chorus of investment banks who have predicted rate adjustments.
Rebuffing the market buzz of an impending rate cut, Fed watcher John Berry argued in a Washington Post article on Friday that the Fed was inclined to leave interest rates unchanged considering the recent positive developments in jobless claims, vehicle sales, and resilient strength in the housing market.
In addition to the Fed meeting, markets will also be watching for the announcement of business inventories, industrial production, consumer price index, and the University of Michigan's confidence survey. Data from the Eurozone consist of German think tank ZEW's economic sentiment, industrial production in France, and quarter two GDP for the Netherlands. And in Japan, the BoJ will release its monthly economic report and final industrial production figures.