U.S. April Core PCE price index remains p 2.1% year over year, while April personal spending rose 0.2%, within expectations, from 0.4% in March. The reports are to further boost the dollar, especially after news of the first GDP decline in Canada since 2003. We expect USD strength to impact oil prices rather than the opposite as expectations for further stability in U.S. payrolls keeping USD bears aside. The chart below shows the London Inter-Bank Offer Rate is ongoing further stability below the 6.00% and is well below the 6.9% highs prevailing through credit crunch crisis. The interest rate is a weighted average of selected London-based commercial banks and its calculation is currently being reconsidered. Although the rate has come down on reduced systemic risk, prolonged market expectations of a Fed pause will keep LIBOR supported via rising bond yields and prolonged macroeconomic uncertainty.
EUR weakness to last into U.S. payrolls week
Euro is set to end its first down week after a string of negative economic data from Germany, which underlines the increased challenges to the persistently hawkish ECB at the expense of the single currency. Germany retail sales showed an unexpected 3.3% decline in April following a 3.8% decline in March, adding to the data deterioration of the Euro zone’s largest economy. Earlier this week, forward-looking GfK index of German consumer sentiment tumbled to 4.9 in June from a revised reading of 5.6 in May. Also, German jobless rose by 4,000 in May, while the unemployment rate stood at 7.9%.
We have long cautioned that the key to protracted losses in the euro lays in negative Euro zone data rather than positive U.S. figures because the former is perceived as a more considerable challenge for ECB policy and for future growth considerations. Nonetheless, next week’s release of U.S. payrolls will be crucial in dictating overall dollar sentiment, including the EUR/USD pair in the event of a clear break out of the current trend, such as a positive reading, which would be the first in five months.
EUR/USD has dropped below our $1.55 target, reaching a two-week low of $1.5460 before rounding to 1.5520. This morning’s U.S. data may act as the catalyst to a revisit of the $1.5470s in the event of a core PCE price index of at least 2.1% and a Chicago PMI of more than 49. Key support stands at $1.5420. Expect resistance to remain heavy at 1.5540 as traders are unlikely to allow dollar weakness ahead of what may be another strong week for the greenback next week ahead of U.S. payrolls.
USD/CAD eyes parity as GDP drops
USD/CAD spikes to 0.9960 from 0.9930 as Canada's real Q1 GDP drops by an annualized 0.3%, showing the first decline in five years, while single month GDP in March dropped 0.2% after a 0.3 decline in February. The data maintains expectations for a 25 basis point rate cut by the BoC next month USD/CAD resistance stands at 0.9970, followed by key resistance at 1.00, which is the 200-day moving average. Support climbs to 0.9940.
USD/JPY hits three-month highs
Yesterday’s 105.89 high in USD/JPY can be considered as a breach of a key resistance and prolonged expectations of a Fed pause may lend further advances in the pair to 106.20 but we remain skeptical due to the challenges encountered by the market and U.S. economy amid further increase in bond yields as long as expectations of a Fed pause remain. We expect the Fed pause to continue into the end of Q3 before prolonged rate cuts emerge. We disagree with any forecasts of rate hikes before Q2 2009. Support climbs to 105.20, backed by 104.80. Key upside stands at 106.30.
Cable seen at $1.9660
Sterling comes off the $1.9790s to $1.9700 in as USD bullishness extends on falling oil prices and increased Fed pause expectations. We continue to expect the pair to breach 1.97 and call up $1.9660 into next week. Next week, we expect the USD gains to impact the oil rather than the opposite as the catalyst becomes U.S. data, with expectations for further stability in payrolls keeping USD bears aside. Cable resistance drops to 1.9770.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
