Euro, Pound on Ease Ahead of Fed Decision (Euro Open)

Euro and Pound traders took a break during the Asian session, ahead of the Federal Reserve’s meeting. It is expected that the Fed will make note of the recent decrease in the U.S. unemployment rate and orient its language toward that fact. Chairman Bernanke and his Board of Governors may revise their language to assure the public that they will act before any form of inflation creeps ahead.

Key Overnight Developments

• Japan Producer Prices Unexpectedly Rise on Imported Inflation
• Australian Wages Meet Slowest Gain in Five Years

Critical Levels

Price action for both the Euro and Pound continued to be subdued against the U.S. Dollar. Traders, in anticipation of the Federal Reserve’s decision, were hesitant to take on new positions ahead of the crucial meeting.

Asia Session Highlights

Japan's Domestic Corporate Goods Prices rose by the largest monthly amount in exactly one year. The 0.4% jump in the cost of raw materials comes after Japanese companies found themselves paying less for such goods nine months in a row. Much of the recent upswing in costs can be attributed to a 7.5% in the cost of petroleum and coal and not necessarily a resurgence of domestic demand-led inflation. Domestic demand-led inflation must be ruled out because it appears as though many of these costs were imported. Indeed, import prices rose 1.1% while the cost of petroleum and coal that was imported rose 7.0%. This was coupled by a 1.5% decrease in the price of goods shipped abroad, which would imply that domestic prices had actually fallen in price.

Australian Quarterly Wages grew at the slowest pace in over five years, as full-time jobs were slashed in favor of part-time ones. The 0.8% gain in labor costs came during a period which saw the unemployment rate rise 0.3 percentage points to 5.8% and 11,100 net full-time positions closed. A lack of wage growth contributed to the stunningly depressive performance of the June retail sales figure. Indeed, the month saw such spending plummet 1.4% after economists had forecast it to actually rise by 0.5%. A market reaction would be inappropriate given the Reserve Bank of Australia's recently revised growth forecast. At it's regularly scheduled meeting last week, the bank predicted that the domestic economy would expand 0.5% in 2009, up from their initial estimate of a 1.0% economic contraction.

Euro Session: What to Expect

The number of new people who found themselves without a job in the month of July, the Jobless Claims Change figure, is expected to increase from that of the previous month’s figure for the first time since February. Indeed, since the second month of the year, the rate of job losses had been easing. This most recent period may indeed actually prove to be as detrimental as the general consensus would have one believe. In the four months following and including March, expectations for job losses were overly pessimistic. But much of these estimation errors came off of an inflation variable which proved to be stubbornly higher than economists anticipated. Last month, however, the CPI figure matched that which was expected and actually fell from that of the period prior. An easing of inflationary pressures during the month prior might actually be implying the jobs have been shedding. Similarly, the ILO Unemployment Rate is anticipated to have risen for the 13th consecutive month a on a rolling 3-month basis. Average Earnings, when excluding bonuses, on a 3-month rolling average have a strong chance of publishing in-line with expectations. A decline here would be appropriate considering the latest result coming from the take-home pay index conducted by Voca for the month of July. Voca found that wages remained consistent between June and July among a sample of companies listed on the FTSE 350. Of course, this study included bonuses paid. When stripping the metric of such auxiliary payments, wage growth may actually prove to be slower than that of the month prior.

The Bank of England’s Quarterly Inflation Report will be closely watched for any revisions in growth forecasts. While job loss numbers have shown to be a breath of fresh air, when compared to initial estimates, there may still be room for a negatively revised GDP forecast. Keep in mind that the economy shrunk by more than double that which was expected in the second quarter. The 0.8% GDP contraction overshot the -0.3% estimate. Such data is likely to weigh on the models that the Bank of England uses in forecasting growth estimates.

Euro-Zone Industrial Production is expected to grow by only 0.2% in June. Considering the slight increase in the Purchasing Manufacturers Index of Manufacturing for June, the estimate seems appropriate. There is, however, somewhat reason to believe that the industrial production figure could grow by more. The more recent PMI figure, for July, grew by a stunning 8.7%.Growth of this magnitude in the PMI might actually be coming off an increase of purchases of industrial goods from the prior month.

Ultimately, the individual pieces of data may have little effect on price action throughout the Euro session. Global investors will be glued to the Federal Reserve's decision. The tone here may be a bit more hawkish, considering that the most recent release of labor data showed that the unemployment rate unexpectedly declined.

Written by Luis Gil, DailyFX Research
Article Source - Euro, Pound on Ease Ahead of Fed Decision (Euro Open)

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