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The dollar shrugged off an uninspiring ISM index to stage a minor comeback during the afternoon session. Despite another bout of triple-point losses in the Dow, the greenback is once again showing a disconnect from equities.
Mirroring the deterioration in the ISM manufacturing survey, the ISM non-manufacturing index fell to 53.1 in July from 57.2 in June, indicating a sixth consecutive month of expansion, albeit at a slower pace. Leading the decline in the index was the new orders component, which showed a multi-month low of 52.6. The employment index also displayed continued weakness in the labor market with a reading below the 50 level, though the contraction did ease slightly. Also worrisome is the rise in the prices paid index to 59 vs 54 in June, which points to an undesirable combination of higher prices and slower economic activity. Further increases in inflationary signals could hamper easing actions by the Fed, since the central bank prefers to take preemptive rather than retroactive moves in the fight against inflation.
While Eurozone services PMI came in within expectations at 52.6, US services ISM gave a better assessment of 53.1. Released last Thursday, Eurozone manufacturing PMI had surpassed its US counterpart, which bolstered the single currency against the greenback. The story, however, was reversed on Monday when it became the dollar's turn to profit from comparably stronger data.
The euro drifted lower against the dollar and is struggling to retake 98.20, which is the 50% retracement of the 97.25-99.20 rally. Interim support starts at 98 cents, and 97.13 still holds as a key level for additional downward moves. Resistance found around 98.80-85, which is the key resistance point on the downward trend line resistance of the channel line extending from the 1.0201 high (Jul 19) through the 1.0065 high (Jul 26) and 99.19 (Aug 02). The 98.77 session-high should provide some interim support if EURUSD breaks above the channel line, followed by 99.58, the 50% retracement of the drop from the 1.0201 high to the 97.24 low.
After a lackluster morning session, USDJPY surged above 119.50 during afternoon trading. A breach above 120 could probe the 120.35-40 highs. Interim resistance is found at 119.50 then 119.25, the 38% retracement of the 120.31 (Aug 1) to 118.61 (Aug 4). Further selling pressure is seen to subside at 119.05-10, with a firmer base at 118.60-65, the 38% retracement of the move from 115.90 (July 24) to 120.40 (July 31).
Shifting gears from previously upbeat diagnoses, economic data from the UK has been looking increasingly bleak lately. Adding to the dismal manufacturing PMI data from last week, manufacturing production and industrial production plunged 4.3% (m/m) and 5.3% (m/m) in June. The combination of decelerating economic activity and record year-to-year jump in housing prices restricts the flexibility of the Bank of England to tackle the economic malaise with interest rate cuts.
Sterling continues to struggle against the dollar as bleak economic news from Britain drags down the currency. Further weakening should see a temporary respite at 1.56. Follow-up support is eyed at 1.5465-70, a floor for prior declines. A breach of this support brings 1.5415 into sight, which is the 62% retracement of the 1.5143 to 1.5866 rally. Meanwhile, resistance is found at 1.57 and 1.5775, with a key level at the 26-month high of 1.5866. The flag formation seen starting around July 23rd continues to hold, which could indicate a resumption of a bullish trend for cable.
USDCHF also strengthened in the afternoon session, with the next key resistance seen around the 1.49 level which rests on the trend line resistance extending from the 1.6775 high (Apr 09) thru 1.6188 (May 15) and 1.5680 (Jun 17). A break above 1.49 faces downward pressure at 1.4955-60. Downside seen initial limited at 1.4750 backed by support at today's low of 1.4677, which is the 20-day moving average. Subsequent support seen at 1.46.
The beneficial effects of a depreciating dollar for U.S. multinationals was reflected in an earnings report from consumer products giant Proctor & Gamble's, who posted earnings of $910 million in Q4 (ending June 30th) in comparison to a $320 million loss a year earlier. The company remarked that the depreciation of the dollar to current foreign exchange rates should have favorable impacts on sales.
Unable to shake off the ISM data and uncertainties surrounding financial stocks, U.S. equities suffered another sell-off on Monday. The Dow closed down by 269 pts at 8043, and NASDAQ fell 42 pts to 1206.
The market will have a shortage of data to seek for guidance tomorrow with Eurozone unemployment providing the main headline. Unemployment is expected to remain stagnant at 8.4%, confirming a sluggish economic recovery in the Eurozone.