US interest rate expected to rise

Euro

The U.S dollar started the week under pressure against the euro as last week's data showing solid U.S growth in the second quarter along with an upbeat reading of regional business activity in July was not enough to help the dollar extend its gains.

The dollar later fell against the euro after an upbeat survey of European factory activity was released. The euro zone PMI, rose to 50.8, in July from 49.9 in June, above the 50.0 forecast by economists and suggested that the industrial sector was on the mend.

The European single currency also benefited from news that Russia's central bank had increased the euro share of its target currency basket and had reduced its dollar share. Meanwhile, the U.S Institute for Supply Management's PMI rose to 56.6 in July from 53.8 in June and above Wall Street's estimates of 54.5.

As the week progressed, a series of economic data released out of U.S failed to support the dollar. Core personal consumption expenditure price index, the Fed's preferred measure of inflation came in flat in June. However, on a year-on-year basis, the index rose 1.9 percent, near 2.0 percent; a level that many analysts think is the upper end of the Fed's comfort zone.

The U.S Commerce Department reported that personal consumption and income rose in June from a month earlier. Meanwhile, factory orders in June rose 1 percent, in line with forecasts, while durable goods orders for the month were revised slightly higher. The dollar continued its loses against the euro in broad-based selling as improving euro zone economic data helped push the euro out of four-week trading range.

The region's services purchasing managers index edged up to 53.5 in July from 53.1 in June, while retail sales grew a higher-than-expected 0.9 percent in June. Furthermore, market talk that oil-rich Middle Eastern countries have been diversifying their dollar-heavy reserves into euro also supported the single currency.

Meanwhile, a report on the U.S service sector failed to move the dollar much. The institute for Supply Management's services index for July came in at 60.5, slightly below forecasts of 60.9 and June's 62.2. At the last trading day the dollar managed to regain some of its losses against the euro, lifted by stronger-than-expected U.S jobs data that reinforced expectations the Federal Reserve will keep raising interest rates at a measured pace this year.

The U.S Labour Department reported that a total of 207,000 new non-farm payroll jobs were created in July, beating economists' median forecast of 183,000. It also revised up the two previous months' job figures by 42,000 jobs, adding evidence of the robust growth sought by the Fed as it seeks to curb inflation through rate hikes.

Next week markets will focus on U.S July retail sales data on Thursday and trade deficit figures on Friday. In Europe, a raft of gross domestic product, inflation and trade data in the euro zone will give investors further insights into the bloc's economic recovery.

Range for this week:
$ 1.2215 - $ 1.2515 (AED 4.4868 - AED 4.5970)

Japanese Yen

Japanese yen kicked off the week on a soft tone against the dollar before an expected parliamentary vote on bills to privatise the postal system, a key part of Prime Minster Junichiro Koizumi's reforms. Koizumi has threatened to dissolve the Lower House of parliament and call a snap election if the bills do not make it through the upper house. A close outcome is expected after the Lower House passed the bills by just five votes.

As the week progressed, yen managed to regain some of its loses against the dollar, supported by a rise in share prices in Tokyo. Benchmark Nikkei average approached the 12,000 mark, a key psychological level that could spur more overseas investors into buying Japanese shares and boosting the yen. Furthermore, traders said dollar selling by Japanese exporters and talk of investors repatriating hefty coupon payments on U.S Treasuries also supported the yen.

However, as the week was coming to an end, luck changed for the yen and it fell against the dollar as more Japanese lawmakers were seen opposing reform bills whose rejection could lead to a snap election. Hirofumi Nakasone, an upper house member of the ruling Liberal Democratic Party who had been seen among swing voters, told party leadership that he would oppose the bills to privatise the nation's vast postal system. A few more lawmakers were seen likely to follow Nakasone, slightly tilting odds against the bills being passed when the upper house vote is held.

Range for this week:
Y 110.40 - Y 113.40 (AED 0.032391 - AED 0.033271)

Sterling

Sterling started the week underpinned against the falling dollar and ignored data showing a weak U.K manufacturing sector. Figures from the Chartered Institute of Purchasing and Supply/NTC research's purchasing manager's index pegged manufacturing activity in July at 49.2 versus 49.6 in June and a forecast of 50.0.

Furthermore, sterling was little moved by slightly weaker-than-expected retail sales figures from the Confederation of British Industry (CBI) which had cemented expectations for a Bank of England interest rate cut later in the week. A sluggish economy and jitters about consumer spending since July 7's deadly bomb attacks in London and a further unsuccessful attack two weeks later have raised expectations of an interest rate cut.

As the week progressed, sterling managed to hit one-month high against the dollar after data showed Britain's services sector expanded faster-than-expected in July. As expected Bank of England cut interest rates by 25 basis points for the first time in two years to 4.50 percent, a move anticipated and fully priced into the markets.

Analysts said discussion was now turning to whether or not the BoE's move was a one-off or the start of an easing cycle. Bank of England is keeping the door open for another rate cut later this year should the economy continue to slow.

However, at the end of the week sterling fell from one-month high against the dollar, with the U.S currency finding respite from strong employment data and the pound getting little support from UK production figures. British factory output rose a bit more than expected in June and quarterly industrial production was better than first estimated.

Range for this week:
$ 1.7640 - $ 1.7940 (AED 6.4795 - AED 6.5897)