The U.S. dollar may be vulnerable to renewed selling in the event that yesterday’s theme of slowing growth and easing inflationary pressures resurfaces in today’s reports on manufacturing ISM and pending home sales. Yesterday’s release of the core personal consumption index (PCE) price index showing a drop to 2.1% from 2.4%, and the Chicago Purchasing Managers' Index (PMI) losing nearly 10 points to 52.7, illustrates evidence of continued slowdown in growth and easing inflationary pressures.
At 10 am EST is the April manufacturing Institute for Supply Management (ISM) expected to remain unchanged at 51. Markets will scrutinize the employment index, which fell below 50 in two of the last three months. The new orders index will also be closely watched after it eased to 51.6 in March from 54.9. This is especially so after the Chicago PMI’s new orders tumbled to 56.5 from 72.2. An easing in the prices paid index from 65 would weaken the Fed’s inflation argument after yesterday’s soft reading on core PCE prices and the core CPI released two weeks ago.
Also at 10 am EST is the National Association of Realtors’ Pending Home Sales Index, expected little changed at 109.4 in March from February’s 109.3 and January’s 108.5. On a year-to-year basis, the index could be expected to fall by as much as 7.0%.
Since housing and manufacturing have been the most consistent sources of the U.S. slowdown, the concentration of today’s releases may prove to be a major drag on the dollar in the event of disappointing figures. Considering the high positive correlation between the Chicago PMI and manufacturing ISM, yesterday’s 8 point decline in the Chicago PMI could well trigger an ISM reading below 50, in which case will trigger sharp dollar losses.
Bearish Divergence in S&P and the Dow
And considering the bearish MACD divergences turns in the Dow and the S&P indices, weak U.S. data (ISM below 50) would exacerbate the pullbacks in these equity indices, in which case would trigger marked declines in the dollar. The positive correlation between USD/JPY and major equity indices is likely to resurface on the downside.
Euro caught between U.S. data risk and Turkey event risk The euro has the fundamental potential to hit a new all time high today on what we expect be to a weak U.S. manufacturing ISM. Nevertheless, the potential for further unrest in Turkey may prove negative for the single currency. Turkey’s most senior court will rule today on whether Foreign Minister Abdullah Gul can take part in a second round of voting for the presidency scheduled for tomorrow. A court ruling in Gul’s favor is expected to trigger a confrontation with the military, which opposes Gul’s religious past. The Turkish Army has threatened the ruling government with a coup if the new prime minister did not distance himself from his “religious roots.”
Despite these political risks, Turkey’s economy stands on a healthier foundation than in 2000, when the Turkish lira was in the midst of a banking crisis and soaring deficits, prompting sharp capital outflows.
We expect renewed bullishness to test the preliminary resistance of 13650, followed by 1.3670. An ISM figure below 50 and renewed declines in the pending home sales index may offer sufficient momentum to call up 1.3690 and 1.3720. Euro support proves to hold at 1.3620, underpinned by 1.3590.
Choppy USD/JPY vulnerable to 119.20
Thin trading volumes are keeping USD/JPY tightly consolidated within the 119.50-65 range. Japanese markets will be open on Wednesday before taking the rest of the week off for Golden Week. But the pair may be vulnerable to a quick bout of selling to 119.35 and 119.20. In the event of extended selling in the major U.S. indices, we expect the pair to test the 119 figure. Upside to remain capped at 119.65, followed by 119.75.
Sterling boosted by Easter retail sales, eyes 2.0080
Sterling rallies on a strong survey from the Confederation of British Industries, showing its retail sales index hitting a three-year high in April at 44, overshooting forecasts of 26. The April manufacturing PMI slipped to 53.9 following a downward revision to 54.2 in the March index. The new orders index dropped to 56.1 from 56.6.
Cable eyes interim resistance at 2.0060, followed by 2.0075. A poor U.S. data showing paves the way for 2.0090. An unexpectedly strong reading from the U.S. reports may drag the pair to 2.0030, followed by 2.0000.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
