Patterns in the forex markets seem to be changing: over a long period of time, whenever the crisis intensified, the dollar and the yen benefited. The more confident market participants became, the more the euro strengthened. Most other industrialised and emerging market currencies benefited from increasing risk appetite as well. As confidence grows that the economy could have bottomed out, markets are now focusing more on comparing developments in individual countries, particularly the pace of recovery in these regions, and when they could decide to end expansive monetary policies and quantitative easing measures.
After the release of the US labour market report last Friday, both the euro and the yen had suffered badly. USD-JPY rose by 2 ½ yen to 97.50, EUR-USD fell from 1.4350 to 1.4150. Then, however, in the run-up to the FOMC meeting, the US currency began to weaken again - presumably mainly because market participants were expecting the Fed to remain cautious and focus on a continuation of its present monetary policy. The Bank of England could have had an impact on market expectations too: the Inflation Report emphasized that the interest rate hikes markets had been expecting would lead to inflation undershooting the target.
The Fed, however, did not take such a decisive stand as the Bank of England. The Fed's assessment of the economic situation was slightly more positive than before: the phrase “the pace of contraction is slowing” was replaced by “economic activity is levelling out”. But the Fed still underlined the weak points, particularly private consumption and corporate investment. The announcement that the $300bn Treasury securities purchasing programme was expected to be completed according to plan by the end of October caused some confusion. Some people saw it - to some extent in contrast to the Bank of England - as the beginning of an exit from quantitative easing. The market's reaction was only 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 second quarter growth figures for the euro area on the one hand, and somewhat disappointing US retail sales figures on the other. According to preliminary estimates, the decline in real GDP in the eurozone slowed down from -2.5% to -0.1% quarter-on-quarter. Compared with the previous year, the decline slowed from -4.9% to -4.6%. The biggest economies in the euro area, Germany and France, have returned to positive growth rates (0.3% respectively, quarter-on-quarter). In both countries, private consumption, public spending and net exports had a positive impact, whereas corporate investment continued to fall.
Then, however, the US retail sales figures dampened the upbeat mood: instead of picking up as expected because of the US cash-for-clunkers scheme, they posted an 0.1% decline in July compared with the previous month. The 2.4% increase in car sales was not enough to push the total figure into positive territory. Sales fell in most product groups, suggesting that new cars are perhaps being purchased instead of other goods.
The sales figures from the US were not good, but not abysmal either. The market's sharp reaction could indicate that market participants are well aware of the risks to the upswing scenario - the labour market and private consumption: an upswing without private households is practically inconceivable in the US. Markets will have to keep a close eye on consumption data such as consumer confidence.
On the US side, we think it likely that the slightly favourable trend in the macroeconomic data could continue for the time being. Next week will see the release of the first August figures for the manufacturing sector, which is benefiting at present from inventory re-stocking and the car scrappage scheme. The housing market is also likely to continue to stabilise. From this point of view, EUR-USD, presently at just under 1.43, could lose some ground again. In the light of surprisingly strong GDP in Q2 and on the general assumption that the ECB is likely to be more hawkish than the Fed, the euro should remain quite well supported, however. It will presumably remain within the trading range for the time being.
