Despite the 0.3% decline in durable goods orders, we expect the dollar to persist its strength and takes command from the bigger than expected 33,000 declines in weekly jobless claims to 342,000, which was the lowest in two months.
The greater than expected decline in Germany’s IFO business sentiment survey coupled with Credit Suisse’s biggest loss in five years are accelerating the euro’s retreat across the board, leaving the yen as the broadest gainer, advancing even against the resurrected U.S. dollar.
The IFO’s business climate tumbled to a 27-month low in April to 102.4 from 104.8 in March, undershooting expectations of a 104.3 reading. The survey follows the seven-month high attained in March, which was the fourth consecutive monthly gain. The IFO survey has proven a key inflection point in the euro’s momentum shift during the 10-year life of the single currency. The deeper than expected IFO decline may start a fresh wave of selling in the euro especially amid looming speculation of a pause by the Federal Reserve after next week’s anticipated rate cut. In the event that the FOMC shows any sign of reducing its easing policy, then currency markets will obtain the necessary green light to accelerate the buying in USD against GBP ($1.9600) and CAD ($1.0230), currencies whose central banks have openly signaled the need to cut interest rates. That would also mean further pullback in the euro towards the $1.5600 figure and onto $1.5530. While such a scenario may be dollar positive, it is likely to weigh on U.S. and global equities on worries that the Fed easing may be ending too prematurely given the undetermined extent of the economic contraction from businesses and consumers.
Shedding light on this week’s $1.60 print in EUR/USD, the climb stood out from the decisive break of the $1.30, $1.40 and $1.50 levels, all of which were triggered by stronger than expected figures from Germany, such as the IFO survey. This week’s print of the $1.60 failed to generate any tangible follow-up because the catalyst was a jump in oil prices to $120 per barrel, rather than Euro zone-specific fundamentals.
USD/JPY seeks weak bias
Unexpectedly low jobless claims to lift USD/JPY past the 104 figure and onto 104.20 until further direction is shaped by the new home sales. While speculation of a temporary pause in the Federal Reserve’s easing campaign is fuelling dollar strength, the impact on the USD/JPY rate remains will largely emerge via the spillover from U.S. stocks. In a month highlighted by broad macroeconomic weakness, equity indices are vulnerable to sharp downside in the event of any perceived change in the Fed’s easing campaign. The potential for reduced risk appetite remains considerable, especially U.S. stocks near the top of their recent range and yen well off its highs. We expect USD/JPY to reach the support of its five-week channel, testing 102.70 and 102.30.
Sterling’s extends erosion, eyes $1.9600
Our negative sterling stance continues to be bolstered by a combination of weak UK data and GBP bearish comments from the Bank of England. March retail sales fell 0.4% m/m after a 1.1% increase. The Confederation of Business Industry trends survey index tumbled to -13% in April from +7% March, while the April Export Orders index dropped to -12% from +3%. Separately, BoE Sentence said sterling’s weakness was unlikely to unwind quickly and that it should boost economic activity. We reiterate our Friday’s FX charts strategy that “the high profile rally to $1.9980 from $1.9600 earlier this week was as high profile as the failure to break above the key $2.00 resistance, suggesting that the technical picture remains largely in synch with the fundamental landscape.” Having broken the $1.98 figure, cable is expected to test the $1.96 and may extend weakness towards $1.95 by month end in the event that the Fed eases by only 25 basis points. Intermittent bouts of strength at $1.98 and $1.99 continue to be characterized as noise in a predominantly downward trend, especially highlighted by the recurring failure to breach above the $2.0100 resistance.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
