After the publication of the U.S. the labor market last Friday, both the euro and the yen had been severely damaged. USD-JPY rose 2 ½ to 97.50 yen, EUR-USD fell from 1.4350 to 1.4150. Then, however, in the period before the FOMC meeting, the U.S. currency began to weaken again - probably mainly because market participants expected the Fed to remain cautious and focus on the continuation of its current monetary policy. The Bank of England might have had an impact on market expectations also: Inflation Report highlighted that higher interest rates than markets expected inflation would hit the target.
The Fed, however, took a position as decisive as the Bank of England. Assessing the Fed's economic situation was more positive than before: the phrase "the pace of contraction is slowing" was replaced by "economic activity has stopped." But the Fed continues to stress the weaknesses, particularly private consumption and business investment. The announcement that the Treasury securities of $ 300 billion procurement program is expected to be completed as planned in late October caused some confusion. Some people saw that - to some extent, in contrast to the Bank of England - as the beginning of an exit from quantitative easing. Market reaction was short-lived, however. This decision was, in fact, in line with expectations.
In the second half of the week, the dollar came under fresh pressure after surprisingly good growth figures for the second quarter in the euro area, on the one hand, and somewhat disappointing U.S. Retail sales figures for the other. According to preliminary estimates, the decline in real GDP in the euro area declined from -2.5% to -0.1% in the fourth quarter. Compared with the previous year, the decline was reduced from -4.9% to -4.6%. The largest euro zone economies, Germany and France, have returned to positive growth rates (0.3%, respectively, in the fourth quarter). In both countries, private consumption, government spending and net exports had a positive impact, while business investment continued to fall.
Then, however, U.S. retail sales figures dampened the optimism instead of taking as expected due to the U.S. cash-for-pots regime, there was a decrease of 0.1% in July compared with the previous month. The 2.4% increase in car sales was not enough for the total amount in positive territory. Sales fell in most product groups, suggesting that new cars are, perhaps, instead of buying other goods.
Sales figures from the U.S. were not good, but not abysmal. Strong market reaction may be given that market participants are well aware of the risks to the recovery scenario - the labor market and private consumption: an improvement without private households is almost unthinkable in the U.S.. The markets will have to keep a close eye on consumer data, such as consumer confidence.
On the U.S. side, we think it likely that the slightly positive trend in macroeconomic data could continue for the moment. Next week sees the launch of the leading figures in August for the manufacturing sector, which now benefits from new inventory and the car scrapping scheme. The housing market also is likely to continue to stabilize. From this point of view, EUR-USD, currently at just under 1.43, you may lose some ground again. In light of the surprisingly strong GDP in Q2 and on the general assumption that the ECB is likely to be harder than the Fed, the euro should remain well supported, however. Presumably, within the trading margins for the moment.
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