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01/06/2008 - Sharply weaker US data points to a 1/2% rate cut on Jan. 30

Posted by FOREX.com's Weekly Strategy in January 4th 2008  
* Sharply weaker US data points to a 1/2% rate cut on Jan. 30
* Recession concerns mount, increasing risk aversion
* Multiple Fed speakers to illuminate growth/inflation debate
* ECB expected to hold rates steady but stay hawkish; BOE will cut UK rates

The first week of 2008 trading got off to an ugly start for currencies, and most other markets for that matter, with JPY-crosses trading sharply lower on heightened risk aversion in the face of data suggesting the US may slip into recession. The Dec. ISM manufacturing index dropped below the 50 expansion/contraction line, coming in at 47.7 vs. the expected 50.5 and a prior 50.8 reading. According to that series, then, the US manufacturing sector has begun to contract. Fed minutes from the Dec. 11 meeting also expressed a far more downbeat outlook for the US along with a more dovish indication that the Fed would cut rates further if the economy were seen to be faltering. Any doubt about that was eliminated when the Dec. NFP report showed a lower number of jobs added (+18K vs. exp. +70K) and a larger than expected jump in the unemployment rate to 5.0% from 4.7% (exp.4.8%). If there's one piece of data that gets the Fed's attention, it a sharp rise in unemployment. Friday's data tells me that the Fed is now going to need to cut rates by 1/2%, and the suddenness of the deterioration in the outlook for the US suggests it may even come before the scheduled Jan. 30 FOMC meeting.  Full text »

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Filed under: Weekly Strategy