The U.S. dollar is rising across the board as traders focus not on the 0.2% decline in April retail sales, which was in line with expectations, but on the 0.5% increase in sales excluding autos, nearly triple expectations as auto sales dropped 2.8% to 10-month lows. The other positive part of the report is the 1.9% rise in building materials. Dollar accelerates gains versus the yen, which will likely lead to broad yen weakness and a potentially strong open in Wall Street.
Euro seen kept under $1.55
Euro is pressured by strong core U.S. sales despite the decline in U.S. retail sales. We expect the euro to remain neutral to negative i.e. within the 1.5250-1.5600 range going forward until the release of the month’s IFO, ZEW and PMI surveys. We do not buy into speculation that the ECB is preparing for a shift towards dovishness. The central bank’s inflation concerns shall remain more than lip service and will only recede in the event of starker evidence of a Euro zone slowdown. It is important to note that the ECB’s inflation mandate does not require it to stand to be ahead of the growth curve when inflation is being compromised. Although this is not the case with the Federal Reserve, we have seen this time last year how Fed officials attempted to preserve inflation expectations in check but eventually caved in to the deterioration in the credit crunch and the weakening economy.
Separately, the ECB’s latest anti-inflation message was sent by Bank of France Chief Christian Noyer indicating that the environment has become “very inflationary” and that we might be piling up inflationary pressures at world level.
We expect euro to retain weak bias, facing resistance at 1.5495-00 before retreating towards 1.5420 and 1.5370 later in the week.
Sterling falls despite CPI jump
The latest manifestation of sterling’s weakness is seen in its deepening sell-off despite today’s release of higher than expected 3% annual rise in April CPI, following a 2.5% reading in March. Unlike yesterday’s release of the record high PPI, the 3.0% jump in consumer inflation generated a short-lived sterling rally, despite the figure growing at its highest in 13 months, and overshooting expectations of a 2.6% rise. We cautioned yesterday that “negative macro dynamics supporting further easing are expected to cease the day. Although rising inflation is supposed to act as an obstacle for the anticipated June interest rate cut from the Bank of England, we do not regard these inflation figures as a tangible positive for the currency’”. The pound had been hit by a broadening data weakness ranging from housing, industrial production, services and construction, the positive currency impact from high inflation may.
Sterling was also dragged by further evidence of the nation’s house price slump when the Royal Chartered Institute of Surveyors showed further deterioration in UK home prices.
Sterling eyes declines at 1.9460, followed by 1.9440s. Key support stands at 1.9380. Upside capped at 1.9530.
Rising USD/JPY to face pressure at 105
USD/JPY recovery sharply from 103.50s on sharp rise in risk appetite as U.S. retail sales show stronger than expected 0.5% increase when excluding motor vehicles. Momentum in the pair is expected to pick up further upon the opening bell, which is likely to face interim resistance at 104.80. Key resistance stands at 105.30. We do caution against excessive dollar gains shrugging the second monthly sales decline in three months. Support climbs to 104.20.
Ashraf Laidi
Chief FX Strategist
CMC Markets
a.laidi@cmcmarkets.com
