Investors' eyes will be turned on the United States this week, with particular attention being paid to the jobs figures that come out on Friday. If they turn out to be weak, it could shift the Federal Reserve, the US central bank, towards favouring a cut in interest rates.
The focus on the US follows a tumultuous week in which the dollar has retraced most of the gains it made this month. The greenback's renewed weakness came as the markets began to wonder whether the fabled "soft landing" might not turn out to be a hard landing, leading to lower interest rates.
The reappraisal of American economic prospects came in response to signs of a sharper slowdown than had been anticipated. In particular, durable- goods orders fell in April by 4 per cent, their largest drop in more than three years.
Home sales fell by 6 per cent and initial jobless claims were much higher than expected.
The indications of economic weakness have led investors to change their betting on the policy of the Fed.
Until recently, most were banking on interest rates staying on hold. Now more and more believe that the Fed could be cutting rates soon. The change in expectation was revealed last week when two-year yields fell below the Fed Funds rate.
The employment and payroll report due on Friday will be particularly important because the numbers will include revisions for the previous three years.
If the revisions show that economic activity has been weaker than had been thought, there is more likelihood of an early cut in rates.
The alternative view is that the current weakness in the economy is simply a pause for breath. The investment house Goldman Sachs, for example, argued recently that a turnaround in the US's current account is on the horizon. An improvement in net exports of $50bn (pounds 31bn) will give a renewed fillip to the economy.
It will also be the signal to the foreign exchange markets that a sustained cyclical recovery in the dollar is under way.
Goldman Sachs also points out that business fiscal investment is still growing fast and fiscal policy appears to be turning expansionary.
As a result, its forecast is that growth in real GDP will accelerate once again, reaching 3 per cent in the second half of 1995 and possibly a 4 per cent rate in the first half of 1996.
George Magnus of SG Warburg also believes that "fundamentals fly in the face of recent talk of hard landings". He believes the extent of the slowdown is being exaggerated.
"The pessimism about the US economy will diminish over the next six to nine months and, more importantly, change interest rate sentiment," he said.Reuse content