Today’s U.S. reports on personal spending, core PCE price index, the Federal Reserve Bank’s favorite inflation measure, and the Chicago manufacturing PMI may potentially trigger a fresh wave of dollar selling on the rationale of slowing growth and retreating inflation. These two factors are the backbone of our expectations for an easing of the Fed funds rate.
Due at 8.30 am is the March core PCE price index expected to have slowed to 0.1% from 0.3% m/m, while the y/y rate is expected to slow to 2.1% from 2.4%, thus, making a significant move towards the Fed’s preferred rate of 2.0%.
Also due at 8:30 am EST is the report on March personal spending and personal income, with the former expected up 0.5% from 0.6% and the latter seen up 0.5% from 0.6%.
A slowdown in personal spending along with slowing core PCE price index would imply that not only the U.S. consumer is backtracking, but also the Fed’s inflation argument is weakening, paving the way for interest rate cuts as early as June, at a time when U.S. growth is at its lowest in four years.
Due at 10 am EST is the Chicago PMI index expected to have dropped to 54 in April after having jumped to 61.7 in April. Considering that the index fell below 50 in January and February, we expect the April figure to come in below expectations at 51.
Also at 10 am EST, are March construction spending expected up 0.2% from 0.3% in February
Euro seen regaining 1.3650s on U.S. growth concerns despite Turkey risk
Our expectations for weaker personal spending and slowing core PCE price index are to boost the euro higher against the dollar, targeting $1.3650 from the current $1.3610. The single currency has come off Friday’s all time high of $1.3682 after the Turkish Army threatened the ruling government with a Coup if the new Prime Minister did not distance itself from his “religious roots.” Unlike in 2000 when the Turkish Lira crisis was triggered by economic concerns, the current crisis is largely a result of political concerns, while economic fundamentals are at their healthiest in over a decade.
Preliminary target stands at 1.3650, followed by 1.3680 and 1.3720. Any downside on strong U.S. data is seen dragging the pair towards 1.3580 and 1.3560. Concerns of weak U.S. payrolls this Friday should help buyers step in and stabilize the pair. Payrolls are expected to growth by 90K following 180K with the unemployment rate seen up at 4.5% from 4.4%.
Yen seen rebounding to 119
USD/JPY fell to as low as 119.18 in early Asian trade before rebounding to 119.73 after Japan’s finance minister played down Friday’s first quarter gross domestic product (GDP) figures from the United States. The initial yen strength took place after China announced another 0.5% hike in banking reserve requirement to 11.0%. We expect the pair to remain capped at 119.70-75 before turning lower on our expectations for U.S. data weakness. Our preliminary support stands at 119. 30, followed by 119.15 and 118.80.
Sterling seen boosted on back of U.S. data
Despite our lack of general optimism for sterling, we expect the currency to flex its muscles at the expense of deteriorating U.S. fundamentals. Further U.S. data weakness this morning is expected to boost cable towards $1.9970, followed by 1.9995. Support stands at 1.9920, backed by 1.9880.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
