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The dollar shed its recent gains on Thursday as weak fundamentals caught up with the greenback. Immediately following the ISM news release, U.S. equities and the dollar plummeted across the board, which helped the euro regain some vigor.
Contributing to the week of sluggish data, the July ISM manufacturing survey tumbled to a stagnant 50.5, a sharp decline from 56.2 in June, sending ripples of dismay across Wall Street and hurting the greenback. Not only did the ISM figure show the steepest drop since October 2001, it also underperformed the Eurozone PMI for the first time since the October plunge. Eurozone PMI in July remained stable at 51.6, hardly an encouraging sign but still stronger that the U.S. figure. Also reinforcing the notion that the economic recovery is taking a breather was the 2.2% drop in construction spending, slightly worse than the 2% revised contraction in May.
While the dollar exhibited some resilience to limp consumer confidence, GDP, and Chicago purchasing managers data earlier in the week, the lower than expected ISM data sparked a steep fall of the greenback vs the majors. It seems that the ISM figure added enough weight to the buildup of worrying news to reverse sentiments about the dollar at the benefit of the euro.
After a streak of lackluster sessions, the euro received a major boost from the dollar's demise. EURUSD soared after the news release but is still struggling to break the 98.35-40 resistance. Failure to strengthen above this level could take the currency back to 97.70-75. Subsequent support is eyed at 97.50 and the July 5 low of 97.13. A resumption of a downturn below 97 cents would then target 95.80, the 38% retracement of the 86.65 to 1.02 rally. In the event of an upward correction, near term gains would face selling pressure at 99.15, the 50% retracement of the decline from 1.0065 (July 25) to 0.9767 (July 29).
In tandem with the dollar's plunge against the euro, USDJPY slid below 120 yen down to a session low of 119.01 before stabilizing around 119.25-50. Immediate resistance lies at 119.50, though in this volatile climate, a mini-rally could easily push the yen above 120. The key 120.70 resistance has held up well so far. On the downside, 118.35 provides an interim base for further declines.
The euro experienced some relief from the sterling after more than a month of selling pressure. The single currency advanced almost a pence vs the sterling to a session high of 63.30 after the release of a dreary UK PMI of 48.9 (prev 50.5) that showed a lull in manufacturing activity for the month of July. Sideway movements is expected in the 62.90-63.20 range until European markets reopen.
Meanwhile, the pound is clawing its way up vs the greenback following the ISM data after hitting a 3-week low of 1.5474. The dollar has demonstrated more resiliency in fending off the pound, which reiterates the importance of the manufacturing data to the currency markets since U.K. PMI deteriorated more than U.S. ISM. Resistance starts 1.5645 and the 157 handle. Support is eyed at 1.5474 and 1.5415, the 62% retracement of the 1.5143 to 1.5866 rally.
Gaining downward momentum from the dreary ISM data, USDCHF plunged more than a centime to a session low of 1.4760. Immediate support found at 1.4725-30, followed by a firmer foundation at 1.47. A break below the crucial 1.47 level would target then 1.4630-35, the 38% retracement of the rally from 1.4367 (July 25) to 1.4904 (July 29).
The U.S. government intensified its campaign to crackdown on corporate malfeasance by ordering the arrest of two financial officers of the bankrupt telecom giant Worldcom. By passing the Corporate Accounting Reform Bill and stepping up disciplinary measures for misbehaving executives, U.S. officials hope to encourage consumers to resume spending and reallocate investments back into the stock market. Unlike Japan's export-dependent economy, the U.S. economy relies more heavily on consumers and investors to lead the path to a sustainable recovery. Rounding out the flurry of data for the U.S. is the release of the July labor report, June personal income, and June factory orders on Friday. In light of the frailty of the data announced this week, these figures are unlikely to offer much cause for optimism. Composite data from the Eurozone includes consumer sentiment, business sentiment, and producers price index. Aggregate sentiments are expected to slump, foreshadowed by the weakness in national sentiment indicators including the Ifo and ISAE.