The euro surged to a new all time high of $1.5966 after Euro zone March inflation was unexpectedly revised to a record 3.6% y/y from the initial 3.3% estimate, validating the European Central Banks’ (ECB) relentlessly hawkish rhetoric and further dampening any chances for a near-term interest rate cut. A broad euro rally is accompanied by a deepening dollar sell-off, prompting oil to a new record of $114.46 and lifting gold to a one-week high of $939 per ounce. Oil’s rally is also prompted by reports of a peak in Russian production.
The extent of resulting dollar weakness is especially highlighted by its decline against the floundering British pound, which has remained on a continued downtrend against all major currencies for the past 4 weeks. It is worth noting that the yen’s rise versus the dollar is not a reflection of falling risk appetite as the currency is being pressured by most of the major currencies. Therefore the theme of falling dollar, rising commodities is likely to prevail throughout the rest of the trading day, with negative earnings surprise being the main downside to this assessment.
China’s decision to raise its reserve ratio on banks for the 16th time since 2006 is having little impact on global equities, but may further complicate the climate for the already tumbling Chinese indices. The People’s Bank of China raised its the reserve requirement by 0.5 percentage point to a record 16% to stabilize escalating credit growth better manage overall.
It will be busy 8.30 am EST when US CPI, housing starts, building permits are due, followed by industrial production at 9.15 am and the Fed’s Book at 2.00 pm. The Markets are bracing for a possible upside surprise in the headline CPI, beyond expected 0.3% following a February figure, with the core CPI seen up 0.2% following a flat figure. Recall that yesterday’s release of a higher than expected PPI boosted the dollar across the board, but that may also be a result of better than expected Empire manufacturing report.
The 9.15 am release of March industrial production is expected to show a 0.1% decline following a 0.5% drop, while capacity utilization is seen at 80.3% from 80.4%.
San Francisco and Philadelphia Fed presidents Yellen and Plosser are due to speak at 11.30 am 12.30 pm respectively. Yellen’s speech will be more of use to the market as it will cover economic outlook.
Euro Nears $1.60 on 3.6% CPI, US CPI May Stop Road to $1.60...for Now
It is another record high for the euro against the dollar and the British pound as the upward revision in March Euro zone CPI to a remarkable 3.6% annual rate from the initial 3.3% estimate justifies the ECB’s escalating hawkishness and dampens chances for rate cut before Q4. The revision, which is rare by the accounts of the European Commission, may be a result of Easter Holiday demand. If that is the case then a possible retreat back to 3.3% or 3.2% a month from now may drag on the currency. In the meantime, euro strength is here to stay as it is a manifestation of not only strong Euro zone economic fundamentals but also continued US weakness. Today’s housing starts/building permits and industrial production reports from the US may accelerate the euro’s upside momentum, with the $1.5990-95 barrier likely to impose itself. Stronger than expected US figures are expected to drag the pair towards $1.59, with 1.5860 acting as a robust support.
EURJPY is seen extending gains towards 161.45-50, followed by 161.90, due to the combination of better than expected earnings from JP Morgan Chase and Coca Cola a possible recovery in risk appetite and US equity indices. Support climbs to 160.70.
EURGBP rally remains a textbook rally in foreign exchange market as the EUR is boosted on rising inflation and robust economic fundamentals while the GBP rests on a slippery slope of further rate BoE cuts that may amount to a total 100 bps. Yesterday we mentioned “Upside capped at 0.8075, followed by 0.8095”. We stick with this call.
Sterling Downtrend Remains Firmly Cemented
GBPUSD strengthens on a broadening dollar decline rather than improved UK fundamentals, thus we deem such a move as another short-lived advance. UK average earnings growth rose by a stronger than expected 3.7% in the 3-months ending in February compared to a year ago, while claimant unemployment count fell by 1.2%, translating into an unemployment rate of 2.5%. Nonetheless, earnings growth excluding private sector bonuses slowed to 3.7% from 4.0%, reflecting what may be the beginning of a long slow period of weak compensation in the financial sector.
Despite today’s 2-cent rebound in GBPUSD, the downtrend remains firmly cemented, with resistance acting at $1.9850. We reaffirm our medium and long term bearishness in GBPUSD with our forecasts to see $1.9300 before $2.0100. Only a break above 1.9930-35 will lead us to abandon our medium term bearish stance for the pair. Interestingly, on Monday, we anticipated the pair would give out at $1.99, after which it lost a full 3-cents to 1.9600.
The predominant deterioration in UK fundamentals means that even an unchanged inflation rate is a negative for a currency, whose interest rate remains at an all too high 5.00%, or a real interest rate of 2.5%, well above 1.7% and -0.75% for the Euro zone and U.S. respectively. High real interest rates are normally positive for currencies, but not in the case of an economy increasingly hampered by a fast slowing housing market, rising foreclosures and tightened credit.
Upside capped at $1.9770, followed by 1.9850. Support seen climbing towards 1.97 for now. Tomorrow’s Philly Fed survey may extend losses back towards $1.9660 and 1.960 in the event of a retreat to the expected -14 from -17.4.
Yen Retreats the Least Against USD
Better than expected earnings from JP Morgan Chase and Coca Cola as well as soaring oil prices are shifting the focus into USD weakness and EUR strength, curbing JPY to the side. We expect USDJPY to retain its upward tone to be limited at 101.55-60. We reiterate that yen’s overall uptrend is expected to continue and that pullbacks such as today are consistently followed by renewed gains, showing the mirror image of US stocks. The lower highs in the USDJPY chart below illustrate a classic bearish case in the USDJPY pair, which is generally similar to other yen crosses. Medium-term view eyes selling at 101.75-80, followed by 102.50.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
