Reinforced Suspicion That The US Economy is Slowing

EUR/USD

The Euro drifted slightly weaker in early Europe on Friday, although movement was inevitably limited ahead of the US payroll data with no test of major support levels. A weaker than expected German industrial production report had a small negative impact on the currency.

The US employment report was weaker than expected with a headline payroll drop of 131,000 for July after a downwardly-revised 221,000 fall the previous month. The unemployment rate held steady at 9.5% for the month.

As expected, there was a decline in government census-related employment, but there were wider job losses in the government sector as budget cuts took effect. The increase private-sector employment was also weaker than expected which reinforced the suspicion that the US economy is slowing.

Following the data there will be renewed speculation that the Federal Reserve will look to announce fresh measures to support the economy through bond purchases at the forthcoming FOMC meeting on Tuesday. At the very least, there will be expectations that additional measures will be discussed which will tend to weaken the dollar.

The dollar weakened sharply following the data and the Euro pushed to a fresh 3-month high around 1.330 before consolidation below 1.33 later in the US session. There will be unease over the global economy, but the data was probably not weak enough at this stage to trigger an escalation in fears.  This may also prevent a substantial deterioration in risk appetite and limit defensive dollar support.

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Yen

The latest comments from business groups suggested that there was relative calm over the impact of yen strength, but the Finance Ministry will still be on high alert over the situation and there will still be the threat of intervention if dollar support levels below 85 are challenged. The dollar nudged just above the 86 level in early Europe on Friday ahead of the payroll data.

The US currency then dipped sharply following the US employment report and hit a fresh 2010 low just above the 85 level before stabilising. Markets remained reluctant to push the yen sharply stronger given speculation that there will be additional measures to curb yen strength and comments from Japanese officials will be monitored very closely on Monday.

Sterling

Sterling consolidated around the 1.59 level against the dollar in early Europe on Friday. The industrial output data was significantly weaker than expected with a 0.5% decline for June following a 0.7% gain the previous month. The manufacturing data was stronger than expected with an increase of 0.3% and Sterling was able to recover ground after initial losses.

The producer-price report was weaker than expected which may dampen unease over inflationary pressures to some extent and will reinforce the policy debate within the Bank of England.

The central bank inflation report will also be extremely important for interest rate expectations and Sterling sentiment next week with markets anxious to assess the balance of inflation and growth forces within the report which will also give a further insight into potential policy decisions. 

Dollar weakness dominated during the US session and the UK currency tested resistance levels close to 1.60 following the payroll report. Sterling was unable to break above this level, nudging back towards the 1.5950 area.

Swiss franc

The dollar was unable to make more than a brief move above 1.05 against the franc on Friday and weakened sharply to lows below 1.0350 following the US payroll data as the US currency was subjected to wider selling pressure. The Euro hit resistance close to 1.3850 against the Swiss currency.

There will be increased doubts over the global economic performance and this is likely to provide some degree of franc protection on defensive grounds, especially if there are fears over the Chinese economy.

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Australian dollar

The Australian dollar was unable to break resistance levels close to 0.9180 against the US currency in Asian trading on Friday, but losses for the currency were limited.

There were renewed gains following the US employment data with a peak close to 0.92 before consolidation just below this level. The Australian currency has gained support on general dollar weakness, but was hampered by doubts over the global economic outlook as all the major potential global economic leaders face substantial difficulties.