Forex Weekly Outlook Jul 29 – Aug 2

The dollar was certainly on the back foot for another week, losing ground against all currencies, with some enjoying nice breakouts. Rate decisions in the US, the UK and the euro zone are accompanied by US GDP and the all-important Non-Farm Payrolls, as the month comes to an end and a new one begins. All these and more, are on our weekly outlook, for this week.

Weekly jobless claims in the US rose to 343K last week, broadly in line with market expectations. The 7,000 addition was mainly related to the annual plant shutdowns during the summer. Economists expected claims to reach 339K. However all in all, the US labor market continues to improve with lower firings and higher salaries. On the housing front, data was mixed, with strong new home sales countered with weak existing home sales. Economic improvement hasalso been seen in the UK and for a change also in Europe. Market reactions were sometimes surprising. Will this trend continue in the coming months?

Let’s Start

1. US Pending Home Sales: Monday, 14:00. Contracts to purchase previously owned U.S. homes increased in May to the highest level in more than six years, climbing 6.7% from a drop of 0.5% in April. The boost in transactions occurred since buyers were worried of a rate climb. Analysts expected a much smaller increase of 1.1%.  A fall of 1.0% is expected now.
2. US CB Consumer Confidence: Tuesday, 14:00. Americans’ confidence reached a five-year high of 81.4 in June, following 74.3 in May amid increased labor market optimism and current economic conditions. Analysts forecast a more modest rise to 75.2. Lynn Franco, director of economic indicators at the Conference Board, claims that the pace of growth is expected to continue. A small decline to 81.2 is anticipated.
3. US ADP Non-Farm Payrolls: Wednesday, 12:15. Private sector job growth increased by 188,000 in June, from a downward revision to 134,000 in May. The manufacturing sector gained 27,000 jobs, construction added 21,000 while manufacturers added 1,000. Economists projected a smaller figure of 161,000 job addition. A smaller increase of 181K is forecast this time.
4. Canadian GDP: Wednesday, 12:30. The Canadian economy advanced by a mere 0.1% in April from March, indicating a slowdown in the second quarter, amid global economic uncertainty. The increase was in line with market predictions. The Bank of Canada forecast annualized growth of 1.8 % in the second quarter. Canadian economy is heavily dependent on the US economy, where recent data indicated modest growth. A small advance of 0.2% is anticipated now.
5. US Advance GDP: Wednesday, 12:30. Real gross domestic product advanced at an annual rate of 1.8 % in the first quarter of 2013. The rise was less than the 3.1% originally expected. And if growth was slow in Q1, expectations are lower for Q2. The US economy is expected to grow 1.0% this time. The Fed still forecasts a growth rate of 2.45% (on average) in 2013.
6. FOMC Statement: Wednesday, 18:00. The FOMC is unlikely to introduce policy changes or supply any big hints this time. The decision is not accompanied by a press conference and isn’t preceded by important data awaiting the Fed’s response. The NFP will be published only afterwards. Bernanke and his colleagues have made a long way in communications, but have sometimes caused confusion. They could clarify that tapering is not monetary tightening and that the interest rate will stay low for a long time. In addition, they could re-iterate that the 6.5% unemployment rate that is related to interest rate changes is a threshold rather than a trigger. And, the message that the new policy depends on the data will also be repeated. The “to taper or not to taper” question will await us in September, when fireworks are expected.
7. UK rate decision: Thursday, 11:00. The MPC could release another statement, but without making a change in policy. Recent economic signs have been positive in the UK. As long as we get a positive GDP number for Q1, QE will probably remain off the cards. The statement could warn again about rising interest rates. Forward guidance is certainly on the cards, but it will probably wait for the BOE’s inflation report rather than the rate statement. Carney would prefer to eat the cake and leave it whole: maintain long term interest rates at low levels without new QE and without pouring fuel into the inflation fire.
8. Eurozone rate decision: Thursday, 11:45, press conference at 12:30. The ECB made a big change in its approach by introducing forwards guidance in July and it also loosened collateral rules. Therefore, we might see the ECB take a break from policy announcements. And, as Draghi tends to move from pessimism to optimism in every meeting, we can now expect an upbeat atmosphere that could help the euro. Draghi is expected to re-iterate the readiness of both the OMT (as yields are higher) and of a negative deposit rate. However, we could see the euro pressured if Draghi signals that there is pressure for a rate cut within the ECB, especially if it is a cut of the deposit rate. There were reports that Draghi wanted a cut last time, but encountered opposition.
9. US Unemployment Claims: Thursday, 12:30. More Americans filed applications for unemployment benefits last week amid annual auto-plant shutdowns. Jobless claims stand at 343,000. Analysts expected claims to reach 339,000. However, despite the rise, the US job market is improving with aslowdown in firings and increases in salaries, which will hopefully lead to a pick-up in consumer spending. A small rise to 346,000 is predicted this time.
10.  US ISM Manufacturing PMI: Thursday, 14:00. U.S. manufacturing activity in the US rebounded in June to 50.9 from 49.0 in May, returning to expansion but labor conditions worsened, dropping to 48.7 from 50.1nin May. Analysts expected a smaller rise to 50.6. The report showed economic conditions are improving at a modest pace.  A further rise to 52.1 is anticipated.
11. US Non-Farm Employment Change and Unemployment rate: Friday, 12:30. Total US nonfarm employment increased by 195,000 in June, above market predictions, in line with the average monthly gain of 182,000. Job growth occurred in leisure and hospitality, professional and business services, retail trade, health care, and financial activities indicating a steady growth pace in the job market. The US unemployment rate remained unchanged at 7.6% a bit higher than the 7.5% projected by analysts. Non-Farm Payrolls are expected to grow by 184,000 while the unemployment rate is expected to decline to 7.5%. It is important to note the participation rate.