www.dailyfx.com .. Euro 1.2250 Barrier * Fourth Time's a Charm?,Dollar Shrugs Off More Good Data...

... * Will Non-Farm Payrolls Deliver Us a Big Move? Yen Rises on Talk of End of Deflation in Japan

US Dollar
It has been a quiet day in the markets with the dollar being sold across the board
against the majors. We received another batch of positive US data this morning but
that has done little for the greenback. Personal income came in higher than
expected at 0.5% while personal spending was right in line with expectations of
0.8%. The gains in the PCE deflator matched last month's rise of 2.2%. Factory
orders also grew by 1.0% (in line) with a sharp upward revision to the May data.
Basically we continue to see good news on the health of the US economy and the case
solidifies for 4% rates, but the market remains hesistant of taking any significant
bias without seeing Friday's non-farm payrolls number. Right now, estimates are
calling for a solid 180k gain, up from 146k for the month of June. Jobless claims
have been at attractive levels while we continue to see evidence of a recovery in
the manufacturing sector. Yet the question remains, if we do get a 180k gain in
payrolls, will it be enough to trigger a breakout in the EURUSD. Unfortunately an
in line estimate will probably do little for the dollar. With some traders are
expecting a downside surprise, we will probably see a knee jerk rally on the back of
an 180-190k gain. If payrolls come in below 150k, we will probably see an extension
in the EURUSD rally, but a much weaker number would be needed to see a meaningful
break above 1.2250. Having already tested that level three times now, perhaps the
fourth time's a charm. Anything above 200k will probably cause a move back towards
1.2000.

Euro
For the fifth consecutive trading day, the Euro has strengthened against the dollar.
In line with the recent trend that we have been seeing, Eurozone economic data
continued to improve. The unemployment rate for the region remained unchanged in
June, but the May rate was revised lower to 8.7% from 8.8%, which marked the first
time in close to 2 years that the unemployment rate has been this low. Producer
prices also accelerated in the month of June thanks to rising oil prices. At this
rate, we may eventually see the ECB lean towards raising rates rather than lowering
rates. When this becomes the case, we could see a sharp reversal in the dollar
rally. Unfortunately this will not come on Thursday. We expect the ECB to remain
firmly neutral. Meanwhile it is interesting to point out that all of the major
banks whose research we have access to (which is at least 4 to 5) have been either
closing out their EURUSD short positions or recommending EURUSD long positions. It
will be interesting to see whether wall street's experts are proven correct. Yet we
remember that it wasn't too long ago when wall street analysts were calling for
1.50 in the EURUSD when we were trading at 1.35.

British Pound
Adding considerable weight on the eve of the Bank of England's policy meeting, the
Confederation of British Industry released their monthly Distributive Trades Survey.
According to the release, the retail sector remained weak as individuals look to be
adversely affected by regional tax increases, housing valuation jitters and interest
rates. As a result, consumption dipped as retailers have not seen annual increases
in sales since the end of last year. Additionally, the volume of sales declined in
the month adding pressure to previous calls for an interest rate cut. Although
reporting nothing new, the survey does ultimately give something for policy makers
to think about and confirms earlier fears that sluggish consumer spending would
ultimately lead to the demise of the economy. Subsequently, the release also
contributes heavily to recent speculation that interest rate reduction decisions are
a for-sure thing. Sparked on earlier comments by Deputy Governor Sir Andrew Large
last week, traders have increased the probability of a cut in the repurchase rate
when the committee meets this time around. However, subtle doubt still remains as
to the speed of additional cuts with short sterling futures aren't pricing in much
room for the rest of the year.

Japanese Yen
Gaining on the session, bullish yen traders bid the asian currency higher as
suggestions that Japan's seven year deflationary stint may be coming to an end
filtered through the market. Bolstering today's action were comments made by Bank
of Japan Governor Fukui. According to the governor, current improvement in economic
conditions was viable and the economy is making headway out of a soft patch.
However, consumer prices remain relatively low as year on year increases in prices
would have to be witnessed before any monetary policy changes can be considered.
Rising on the aforementioned comments, the domestic currency rocketed higher in the
session and disregarded continued loftiness in crude oil trading. Higher oil prices
mean lower bottom lines for exporters and manufacturers as the economy imports close
to 98 percent of its oil consumption. However, with recognition of potential
inflationary concerns by policy officials, traders opted to side with a potential
shift in monetary policy rather than a momentary rise in the precious commodity.
Additionally, overall political risk was tempered during the session as Prime
Minister Koizumi made conciliatory statements to his opponents in the Upper House as
the vote on the postal privatization deadline looms. In changing previous
overtones, the prime minister is hoping to sway considerable votes to approve the
deal rather than build opposition as he had when previously speaking to the Lower
House.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com


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