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GBP/USD: the chances for a "soft" Brexit are rapidly decreasing, the pound has fallen to two-year lows

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TheGBP/USD pair slipped to the lowest level since 2017 (to the level of 1.2420).

Several factors are playing against the British currency at once: this is a high probability of the implementation of a "hard" Brexit, and a moderate economic growth in the country, and the fact that the monetary policy of the Bank of England can move to a more "soft" course.

On the eve of the two candidates for prime minister, Boris Johnson and Jeremy Hunt, stated that even substantial concessions on the part of the European Union on the regulation of the Irish border may not be enough to ratify the "divorce" agreement. This heightened concerns that the new British government's stance on Brexit would be more rigid, which could lead to the breakdown of the London-Brussels talks and the withdrawal of the United Kingdom from the EU on October 31 without a deal.

According to analysts, the dynamics of the GBP/USD pair reflects the general mood of the market in relation to the pound.

In this regard, it is noteworthy that the British currency was unable to use even the positive statistics on the country's labor market today.

According to the National Statistical Office (ONS), the average salary (including premiums) increased by 3.4%, in March-May with an expected growth of 3.1%. At the same time, unemployment remained at the lowest from October-December 1974 - 3.8%.

The employment sector in the country remains one of the few that remains stable despite the constant stress caused by Brexit.

The futures market is already expecting a 50% chance of lowering interest rates by the Bank of England in 2019 due to the risk of Great Britain's chaotic exit from the EU, as the policy outweighed stronger than expected labor market data.

This month, the pound sterling hit a two-year low against the US dollar.

Analysts polled recently by Bloomberg report that the situation may worsen next month. Moreover, this is an established trend: the fall of the pound against the dollar in August has been noted over the past five years.

"In any case, we will have enough cause for concern in August, with the arrival of the new prime minister of Great Britain, as we are approaching October 31," the currency strategists of Royal Bank of Canada believe.

"Since the British Parliament has gone on summer vacation, the deadline for the UK's withdrawal from the EU is inexorably expiring," said MUFG analyst Lee Hardman.

ING Group believes that B. Johnson will become a leader who will not succeed in concluding a new agreement with Brussels. This will increase the likelihood that Great Britain will leave without a deal.

The main message of B. Johnson during the Brexit campaign was that this event would not have a negative impact on the British economy. However, the irony is that the ex-foreign minister may become the prime minister of the country just at the moment when the national economy will fully experience all the Brexit.

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The decrease in USD rates is decided, but what do they think on Wall Street

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The response of the market to the strong US retail sales was negligible; traders preferred to focus on the next comments of the Fed. Therefore, on Wednesday, the dollar was only able to fix the growth of the previous session just above the level of 97.

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Speaking in Paris, Jerome Powell intervened in market expectations again, hinting at the risks of lowering inflation expectations, which requires a more flexible policy adjustment from officials. At the same time, the Federal Reserve persists in ignoring traditional fundamental data, showing its concern with leading indicators. After Powell's speech on Tuesday, the odds of a 50 bps rate cut increased to 31%. At the same time, the head of the Central Bank was able to convince the market that the Central Bank would be able to stimulate inflation, since the market metrics of inflationary expectations turned into growth from the end of June.

Thus, pressure on the American economy comes from trade relations with partners. Inflation expectations declined after the announcement of an increase in tariffs for Chinese goods. Powell has pointed out on this for more than once. It cannot be ruled out that the reaction of inflation expectations to the bottom was a "foresight" of the new cycle of mitigation of policy in response to the escalation of tariff tension. In this case, the Central Bank is led, as it responds to a false signal and ignores strong economic reports.

Be that as it may, it is difficult to consider a reduction in the rate of half a percent at once as a reasonable precautionary measure. The labor market and retail volume are growing quite confidently.

Next week, the ECB is expected to give a strong stimulus signal, which will reduce the risks of a further slowdown in growth abroad. This is one of the reasons for the Fed's concerns, along with the trade war. Friday's report on US GDP may contain a positive surprise, at least there are prerequisites for this. In this scenario, traders are unlikely to sell dollars.

Estimates and expectations of the world's largest banks about the Fed rate cut

The Goldman Sachs are waiting for the reduction of 25 basis points in July and another by the same amount until the end of this year. A similar opinion is shared by experts JPMorgan.

Everyone understands that the Fed is set to soften the policy in July, they write. The situation in the world remains alarming, business sentiment continues to deteriorate, and deflation signals from a slowdown in producer price pressure put pressure on corporate profits. The combination of these factors has a negative effect on the increase in capital expenditures in the world.

Representatives of Morgan Stanley and UBS predict an aggressive policy easing - immediately by 50 basis points without an additional reduction before the end of the year. In their opinion, the current situation requires decisive action. Over the past 12 months, the global economy has noticeably slowed down, aided by trade conflicts. US GDP also risks slowing growth.

Citigroup, on the other hand, forecasts a quarter percent decline in July and the same in September. According to them, a decrease of 25 basis points is a kind of compromise on the committee. Although, it is possible that some officials will vote to reduce by 50 basis points.

There is a consensus in Bank of America and Barclays. Jerome Powell made it clear that at the next meeting, the rate will be reduced regardless of statistics, they comment. The cost of lending will decline by at least 0.25% in July and another 0.5% by the end of the year.

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CBI Urges Next UK PM To Act Fast To Get Economy Back On Track

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The next UK Prime Minister should restore confidence and take action to bring the economy back on track, the Confederation of British Industry said in its Business Manifesto published Monday. Carolyn Fairbairn, the CBI's Director General called for a clear direction for the UK and to build a long-term vision that drives in investment and back business as a foundation of a growing, inclusive economy.

Brexit has stalled progress on the UK economy for three years. A Brexit deal remains a top priority for business, but a broader vision is needed, the lobby noted.

"Early signals matter. The UK is a fantastic place to do business but we must be honest - the reputation of our country has taken a dent in recent times," Fairbairn said.

"Our new Prime Minister has a real chance to inject a new lease of life into the UK economy and show the world we are open for investment."

The manifesto also called for fast action to show world that the UK remains a trusted place to do business and to build a compelling economic vision for the UK of the future.

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BoJ Closely Examining Heightened Global Uncertainties, Says Kuroda

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The Bank of Japan is carefully monitoring heightened uncertainties regarding the global economy as some nervousness has been seen in global financial markets, Governor Haruhiko Kuroda said Tuesday.

"We will carefully examine various risk factors, in addition to developments in economic activity and prices as well as financial conditions, and weigh the benefits and costs of the policy effects," Kuroda said in a speech at the International Monetary Fund.

He said Japan's economy is no longer in deflation as the central bank continued its powerful monetary easing.

"The positive annual CPI inflation has taken hold, and the economy is no longer in deflation in the sense of a sustained decline in prices," Kuroda added.

Inflation is in the range of 0.5-1.0 percent. The banker reiterated that the BoJ will persistently continue with easing in order to maintain the momentum toward achieving 2 percent inflation target.

However, Kuroda said it is not easy to continue with such powerful quantitative and qualitative monetary easing for a long time.

Further, he said the bank adopted yield curve control in 2016, aiming to control both short-and long-term interest rates of bonds.

"In exerting monetary easing effects stably for a long time, the Bank judges that yield curve control is a better framework in terms of both controllability and sustainability," Kuroda added.

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Gold in anticipation of the Fed rate cut

Surprisingly, but a fact: amid the strengthening greenback, gold renews its perennial highs.

Since 2013, the precious metal has been trading in the range of $1050-1385 per ounce, and only recently strengthened expectations regarding easing of monetary policy by the Federal Reserve System (FRS) of the United States allowed quotes to come out.

The main obstacle in the path of "bulls" on XAU/USD is traditionally considered to be a strong dollar, but even now its position does not seem to be hopeless. What then is the matter?

If in 2014-2018, the US currency showed growth due to the tightening of the monetary rate of the Fed, then at present it remains stable primarily due to the weakness of competitors.

The Fed is signaling its intention to carry out monetary expansion for preventive purposes. The Bank of England in front of the "hawk" turns into a "dove". The ECB is also ready to ease monetary policy.

In conditions when it is difficult to find a strong currency, investors switch to other assets.

Promotions?

The historical highs of the S&P 500 index are undoubtedly impressive, but the higher it grows, the stronger the impression that this is a "bubble". The only driver of the rally is investor confidence in aggressively lowering the Fed rate. If the US central bank does not go in the wake of the market, the fall of the S&P 500 will be guaranteed. Bonds?

Under normal conditions, bonds act as an alternative to gold and take advantage of it in the form of interest income. However, when the volume of negative-yield bonds traded on the global market increases by leaps and bounds, and currently exceeds $13 trillion, investors start looking at the yellow precious metal in a completely different way. Buying gold seems to be the best choice for them. In fact, which is preferable: not having interest income or paying extra for the fact that you own bonds?

Is it any wonder, then, that in the conditions of only a formally strong dollar, the increasing risks of lowering the S&P 500 and the growing number of traded bonds with negative yields, investors prefer gold? Gold ETF reserves have already exceeded 74 million ounces - less than 18 million below the record high of 92 million ounces recorded in 2011.

"The vector of the monetary policy of key central banks seems to have changed, so we are optimistic about the prospects for the yellow precious metal," said experts from Citigroup. "

We expect the Fed to cut its interest rate by 25 basis points at the July meeting. At the same time, we do not exclude that the regulator can reduce it immediately by 50 basis points. The beginning of the decline in interest rates in the United States will be a positive event for the bulls on gold," they added.

According to Citigroup's forecast, in the third quarter the price of gold will average $1,425 per ounce, and in the fourth quarter - $1,450.

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Japan Producer Prices Rise 0.7% On Year In June

Producer prices in Japan were up 0.7 percent on year in June, the Bank of Japan said on Thursday - shy of expectations for 0.8 percent and down from the upwardly revised 0.9 percent gain in May (originally 0.8 percent).

On a monthly basis, producer prices eased 0.1 percent after sliding 0.2 percent in the previous month.

Individually, prices were up for transportation, real estate, advertising and leasing. Prices were steady at financial services and down for communication and information services.

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UK Private Sector Activity Continues To Contract: CBI

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The UK private sector activity continued to fall in three months to July but at a slightly slower pace, the monthly growth indicator from the Confederation of British Industry showed Sunday.

The balance of firms posting growth came in at -9 percent. This was the ninth straight rolling quarter of either flat or falling volumes.

Services activity logged a slower decline amid a marked decrease in both distribution and manufacturing volumes.

Nonetheless, private sector growth is forecast to pick up, with a balance of 9 percent expecting an improvement in the three months to October.

The growth indicator suggested a subdued start to the third quarter, following other recent data which indicated economic growth slowed noticeably in the second quarter of 2019.

"A new Prime Minister marks a fresh start and early signals matter," Annie Gascoyne, CBI director of economic policy, said. "Business is looking for a Brexit deal that unlocks confidence; clear signals the UK remains open to the world; and a willingness to work together with business on issues ranging from climate change to digital connectivity."
 
Japan Industrial Production Slides 3.6% In June

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Industrial output in Japan was down a seasonally adjusted 3.6 percent on month in June, the Ministry of Economy, Trade and Industry said in Tuesday's preliminary reading.

That missed forecasts for a decline of 1.8 percent following the 2.0 percent gain in May.

On a yearly basis, industrial production sank 4.1 percent - again missing expectations for a drop of 2.0 percent after sliding 2.1 percent in the previous month.

Upon the release of the data, the METI maintained its assessment of industrial production, saying that it continues to fluctuate indecisively.

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European Economics Preview: Eurozone GDP Data Due

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Quarterly national accounts, flash inflation and unemployment figures from the euro area are due on Wednesday, headlining a busy day for the European economic news.

At 2.00 am ET, the Nationwide Building Society is slated to issue UK house price data for July. Economists forecast house prices to rise 0.1 percent annually after climbing 0.5 percent in June.

In the meantime, retail sales and unemployment reports are due from Germany. Economists forecast retail sales to grow 0.6 percent on year in June, slower than the 4 percent increase in May.

At 2.45 am ET, France's Insee releases flash inflation data for July. Inflation is expected to remain unchanged at 1.2 percent.

At 3.00 am ET, GDP from Spain and foreign trade from Turkey are due.

At 3.55 am ET, the Federal Labor Agency is scheduled to issue Germany's unemployment figures. The jobless rate is seen unchanged at 5 percent in July.

At 4.00 am ET, Italy's unemployment figures are due. The jobless rate is expected to rise slightly to 10 percent in June from 9.9 percent in May.

At 5.00 am ET, Eurostat publishes Eurozone GDP, inflation and unemployment figures for the second quarter. The economy is forecast to grow 0.2 percent on quarter, slower than the 0.4 percent expansion in the first quarter.

Flash inflation is expected to ease slightly to 1.1 percent in July from 1.2 percent in June. Economists forecast euro area jobless rate to remain unchanged at 7.5 percent in June.

At 6.00 am ET, Italy's Istat releases GDP data for the second quarter. GDP is expected to drop 0.1 percent on quarter, reversing a 0.1 percent rise in the first quarter.
 
Philippines Manufacturing Sector Picks Up Steam In July - Market

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The manufacturing sector in the Philippines continued to expand in July, and at a faster rate, the latest survey from Markit Economics revealed on Thursday with a manufacturing PMI score of 52.1.

That's up from 51.3 in June, and it moves further above the boom-or-bust line of 50 that separates expansion from contraction.

Individually, new order growth was at its strongest in six months, while employment rose for the first time since February.

Output price inflation was at a two-year low.

With output and sales growth remaining strong, businesses remained optimistic regarding future activity.

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European Economics Preview: Eurozone Retail Sales Data Due

Retail sales and producer prices from Eurozone are due on Friday, headlining a light day for the European economic news.

At 2.30 am ET, the Federal Statistical Office is scheduled to issue Swiss inflation figures. Inflation is seen easing to 0.5 percent in July from 0.6 percent in June.

At 3.00 am ET, retail sales data is due from Hungary. Economists expect sales to grow 6 percent on year in June, after rising 2.6 percent in May.

At 4.00 am ET, Italy's Istat publishes industrial production data for June. Economists forecast output to drop 0.3 percent on month, in contrast to a 0.9 percent rise in May.

At 4.30 am ET, IHS Markit releases UK construction Purchasing Managers' survey data for July. The construction PMI is forecast to rise to 46.0 in July from 43.1 in June.

At 5.00 am ET, Eurostat releases euro area retail sales and producer price data. Sales are forecast to grow 0.2 percent on month in June, reversing a 0.3 percent drop in May.

Economists expect producer prices to climb 0.8 percent annually in June after rising 1.6 percent a month ago.

In the meantime, Italy's retail sales data is due for June. Sales had decreased 0.7 percent on month in May.

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Australia's Service Sector Growth Moderates In July

Australia's service sector growth momentum slowed at the start of the third quarter driven by a weakening trend in new business inflows, data from IHS Markit showed Monday.

The Commonwealth Bank of services business activity index fell to 52.3 in July from 52.6 in June.

The overall sales growth moderated in July as domestic demand conditions softened despite a solid increase in new export business. Further, service related jobs fell at the steepest pace in the series history.

On the price front, data showed that input price inflation was the fastest for nine months driven by greater energy costs. Meanwhile, output price inflation remained moderate in July.

Service providers remained upbeat about longer-term prospects as sentiment towards the year-ahead outlook stayed in positive territory. Reflecting softer expansions in manufacturing and services, the composite output index declined to 52.1 in July from 52.5 in June.

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Australia Has A$8.036 Billion Trade Surplus In June

Australia posted a merchandise trade surplus of A$8.036 billion in June, the Australian Bureau of Statistics said on Tuesday.

That beat expectations for a surplus of A$6.0 billion and was up from the upwardly revised A$6.173 billion surplus in May (originally A$5.745 billion).

Exports rose A$576 million (1 percent) to A$42,378 million. Non-rural goods rose A$758 million (3 percent). Rural goods fell A$170 million (4 percent) and non-monetary gold fell A$37 million (2 percent). Net exports of goods under merchanting remained steady at A$18 million. Services credits rose A$26 million.

Imports fell A$1,287 million (4 percent) to A$34,342 million. Capital goods fell A$600 million (9 percent), consumption goods fell A$450 million (5 percent) and intermediate and other merchandise goods fell A$366 million (3 percent). Non-monetary gold rose A$132 million (28 percent). Services debits fell A$2 million.

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The greenback receives a "black mark" from Trump

Last week, the United States announced the introduction of new tariffs on Chinese imports, in response to which China has allowed its national currency to fall to record lows.

Washington's reaction was not slow. The US administration has officially recognized China as a currency manipulator.

"The goal of China's devaluation of the national currency is to gain an unfair competitive advantage in international trade," the US Treasury said.

China has rejected all the accusations against it.

"This stigma is completely inconsistent with the criteria set by the US Treasury for countries engaged in manipulating the exchange rate. Action from the United States is a one-sided and protectionist act that seriously violates international standards. This will have a serious impact on the global economy," according to a statement from the People's Bank of China.

According to analysts, the decision of the US Ministry of Finance to classify China as currency manipulators could lead to the outbreak of a currency war between the two countries.

"The implications of China's recognition of the currency manipulator could be colossal. The United States may use this decision as a pretext for introducing additional unilateral prohibitive duties. This will lead to the closure of all imports from China, " warns professor of Cornell University Esvar Prasad.

It is assumed that if Donald Trump feels that the US economy will slow down against the backdrop of current events, the possibility of conducting currency interventions with the aim of weakening the dollar will again be on the agenda.

Serious pressure on the greenback is currently being exerted by recent expectations that the Fed will aggressively weaken monetary policy.

The probability of a federal funds rate cut by 25 basis points at the September meeting is now estimated at more than 75%. It is noteworthy that a week ago the chances of an additional round of rate cuts were only 60%.

"The US central bank seems to be held hostage by markets for which the expectation of cheap money is the only argument in favor of growth," Raiffeisenbank analysts said.

"There is another important factor - the pressure from the US president, who desperately needs economic growth to be re-elected for a second term and who has been raining tweets on the Fed for more than a year, calling the leadership of the US central bank incompetent and demanding a weaker dollar to win the trade war with China," said MUFG economist Chris Rupkey.

Citigroup believes that if the Federal Reserve cuts rates in an attempt to smooth out the impact of the global GDP slowdown on the US economy, the monetary policy created by protectionism will not solve the problems.

According to Judy Shelton, who was recently nominated by D. Trump as an official of the FOMC, monetary stimulation is more effective for manipulating currencies than for accelerating economic growth. This is again an argument in favor of the fact that by increasing tariffs on Chinese imports, the owner of the White House provokes an escalation of not only trade, but also currency war.

Apparently, the head of the US administration decided to raise rates at the same time both in discussions with the Federal Reserve and with Beijing.

However, for strong EUR/USD growth, just wanting to weaken the greenback is clearly not enough, and buying the euro should be considered only in the event of breaking resistance at 1.133 and 1.137, while a return to support at 1.1175 and 1.112 will create the prerequisites for opening shorts.


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European Economics Preview: France Business Confidence Data Due

Business confidence from France is due on Thursday, headlining a light day for the European economic news.

At 2.00 am ET, Statistics Norway releases industrial output data for June. Economists forecast production to grow 0.3 percent on month, the same rate as seen in May.

At 2.30 am ET, Bank of France is scheduled to issue business sentiment survey results. The confidence index is forecast to rise to 96 in July from 95 in June. The survey also shows GDP estimate.

At 3.00 am ET, consumer prices and foreign trade figures are due from Hungary. Inflation is expected to remain unchanged at 3.4 percent in July.

At 4.00 am ET, the European Central Bank is slated to issue monthly economic bulletin.

At 5.00 am ET, consumer prices and labor force survey results are due from Greece.


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European Economics Preview: UK GDP Data Due

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Quarterly national accounts from the UK and foreign trade from Germany are due on Friday, headlining a busy day for the European economic news.

At 1.45 am ET, the Swiss jobless data is due from the State Secretariat for Economic Affairs. The unemployment rate is forecast to remain unchanged at 2.3 percent in July.

At 2.00 am ET, Destatis is scheduled to issue Germany's foreign trade data. Exports are forecast to drop 0.1 percent on month in June, in contrast to a 1.1 percent rise in May.

In the meantime, consumer and producer prices are due from Norway. Consumer price inflation is expected to ease marginally to 1.8 percent in July from 1.9 percent in June.

At 2.45 am ET, France's Insee publishes manufacturing output figures for June. Economists expect manufacturing output to fall 1.3 percent on month in June, after rising 1.6 percent in May.

At 4.30 am ET, the Office for National Statistics releases UK GDP, industrial production and foreign trade data. The economy is forecast to remain flat on quarter in the second quarter, after expanding 0.5 percent in the preceding period.
 
Australia NAB Business Conditions Weaken; Sentiment Improves

Australia's business conditions weakened in July reflecting the decrease across most industries, while confidence edged higher, survey data from the National Australia Bank showed Tuesday.

The business conditions index fell 2 points to +2 in July driven by a decline in the employment sub-indicator.

Meanwhile, the business confidence index rose to +4 from +2 a month ago, driven by an improvement across industries. Sentiment remained highest in mining.

The NAB said the business sector has lost significant momentum since early 2018 and forward looking indicators do not point to an improvement in the near term. The lift in confidence following the election appears to have faded with little impact on actual conditions.

According to NAB, both the cut to interest rates and boost to tax rebates is yet to feed into the business sector and that the weakness in the second quarter has persisted into the third quarter.

"With a significant loss of momentum in activity, and inflation indicators remaining weak, the survey points to the need to the need for further stimulus in the economy," Alan Oster, NAB Group chief economist, said.

"Indeed, we expect a further easing in interest rates from the RBA and think that some greater fiscal support will be needed from the government to kickstart growth," Oster added.

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China's Industrial Output, Retail Sales Growth Slows

China's industrial production and retail sales grew at weaker pace in July, data from the National Bureau of Statistics showed Wednesday.

Industrial output growth eased to 4.8 percent in July from 6.3 percent in June. Output was forecast to expand 6 percent.

Likewise, growth in retail sales slowed to 7.6 percent from 9.8 percent a month ago. This was the weakest growth in three months. The expected pace of growth was 8.6 percent.

During January to July period, fixed asset investment logged an annual growth of 5.7 percent compared to 5.8 percent increase in January to June. The rate was forecast to remain unchanged at 5.8 percent.

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Australia Unemployment Rate Unchanged At 5.2% In July

The unemployment rate in Australia came in at a seasonally adjusted 5,2 percent in July, the Australian Bureau of Statistics said on Thursday - unchanged from the previous month and in line with expectations.

The Australian economy added 41,100 jobs last month, far surpassing expectations for a gain of 14,000 jobs following the increase of 500 jobs in June.

The participation rate was 66.1 percent, exceeding estimates for 66.0 - which would have been unchanged from the previous month.

Unemployment increased 800 to 712,900 persons.

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Japan Has Y249.6 Billion Trade Deficit In July

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Japan posted a merchandise trade deficit of 249.6 billion yen in July, the Ministry of Finance said on Monday.

That missed expectations for a shortfall of 194.5 billion yen following the 589.5 billion yen deficit in June.

Exports were down 1.6 percent on year, topping forecasts for a decline of 2.3 percent following the upwardly revised 6.6 percent drop in the previous month (originally -6.7 percent).

Imports dipped an annual 1.2 percent versus forecasts for a decline of 2.3 percent following the 5.2 percent fall a month earlier.

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