US strength, BoE decision under focus

LONDON: A raft of US data next week will help investors judge the strength of the world’s biggest economy and how far US borrowing costs could rise this year.

But most analysts see major European interest rate decisions as more of a formality with the Bank of England forecast to cut rates to 4.5 percent and the European Central Bank to keep euro zone rates steady at 2.0 percent next week. “We need further demonstration of US economic strength — that is why next week’s data is pretty key,” Mellon Financial Corporation head of foreign exchange research Ian Gunner said.

The dollar has strengthened in recent months, helped by forecasts of US rates rising to about 4.0 percent by year-end. The market will focus on US employment, factory and services data to gauge how higher borrowing costs are affecting the economy.

“The question is whether any of this data can change perceptions about the Fed (US Federal Reserve),” TD Securities chief economist Jim Webber said. Analysts expect the US July manufacturing index due on Monday from the Institute for Supply Management to register 54 against 53.8 in June. The ISM July non-manufacturing index due on Wednesday is expected to dip to 61 from 62.2 in June.

US July non-farm payrolls on Friday are forecast to show 180,000 new jobs, up from 146,000 in June. “Any weak (payrolls) number might give a bit of support to the bond market but is not going to stop the Fed from raising rates,” TD Securities’ Webber said.

Higher rates not hurting growth: The US Federal Reserve has raised its key Fed funds rate 225 basis points to 3.25 percent in the past year and some analysts suggest rates could go beyond 4.0 percent this year without extinguishing growth.

“The US economy is decelerating very slightly from 2004’s pace but is still being supported by strong domestic spending,” Westpac international economist James Shugg said. “There has been very steady growth through this period of tightening.”

But the prospect of higher rates may not be enough to keep supporting the dollar.

“There could be too much good news on the dollar,” Shugg said. “The risk is the data flow struggles to keep beating elevated expectations.” Most analysts polled by Reuters expect the Bank of England to cut rates for the first time in two years on Thursday, lowering them to 4.5 percent from 4.75 percent after four out of nine policymakers voted for a cut this month.

A sluggish economy and fears about consumer spending since July 7’s deadly bomb attacks in London and a further unsuccessful attack two weeks later have raised expectations of a rate cut, but beyond that the market is cautious. “I do not think they (BoE) are going to be too aggressive,” TD Securities’ Webber said. “They will try to find a way to say we are not doing this again next month.” reuters

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