The bigger than expected U.S. figures on U.S. housing starts and building permits combined with yesterday’s release of deteriorating housing market index to 18 from 19 is another stark reminder for Fed funds futures, which are guided by actual trading, not to get ahead of themselves in pricing rising chances of a rate hike later this year. Specifically, building permits are a largely forward looking item that suggests the worst is far from over in U.S. housing. May U.S. housing starts fell 3.3% to a 975,000, below the expected 980,000. Building permits fell 1.3% to 969,000.
May PPI rose 1.4% m/m and 7.2% y/y, while core PPI rose 0.2% m/m and 3.0% y/y confirming last week’s run up in CPI.
Currency market flows are shifting away from dollar-centric dynamics to pound and euro specific dynamics after a negative German investor sentiment survey and further inflation deterioration in the UK weighed on the euro and the pound across the board. The dollar reaction is positive, especially amid oil prices’ retreat off their latest highs, which were caused by supply disruptions in the North Sea.
Sunday’s emergency meeting in Saudi Arabia between oil producers and consumers, combined with next Wednesday’s Federal Open Market Committee (FOMC) decision may be serve as a powerful recipe for a lasting dollar rebound. Or so that’s what policy makers wish to be the case. In the event that Saudi Arabia sticks with its decision to raise production to 10 million barrels per day (mb/d) from 9.45 mb/d and the Federal Reserve makes moves further away from a balanced monetary policy stance towards a hawkish directive, then currency markets will reward the U.S. currency, at least in the short term that U.S. interest rates have cemented a bottom and could rise as early as Q4 of this year. Regardless of the notion of whether the U.S. economy can handle a rate hike at such an early stage, the power of expectations could be especially USD positive against GBP, CAD and JPY. But not so against EUR as the European Central Bank (ECB) has communicated a rate hike to occur as early as next month, thus, offsetting the upward USD impact from any change in Fed stance.
Euro supported by poor U.S. housing
Germany’s ZEW institute's index on investors’ expectations tumbled to -52.4 in June from May’s -41.4, while the current situation index fell to 37.6 from 38.6, better than expectations of a 37.0 reading. The euro did pull back off its $1.5550 high to 1.5450, but remains well above its 200-day moving average (MA) of 1.5405, breached yesterday. The fact that the pair rose above this key technical level as soon as one day after it fell below it reflects the markets’ hesitance to shun the euro in favor of the USD.
Since trading in the EUR/USD pair accounts for nearly 27% of overall daily turnover in global currency markets, the pair represents the markets’ general sentiment in the U.S. currency. Looking at the historical pattern of the EUR/USD pair vis-à-vis its 200-day MA, it is unlikely the pair will break below $1.5150 in the medium term. Interim support is expected to hold at the 200-day MA of 1.54, backed by 1.5360. Resistance remains capped at 1.5570.
USD/JPY still unable to break 200-day MA
The Japanese government’s second monthly downgrade of its economic assessment in four months has helped all currencies gain ground versus the yen, but emerging nervousness by equity markets regarding the repercussions of higher U.S. interest rates may serve as a positive for the currency. We reiterate the importance of the 200-day MA, currently at 108.25, which was briefly broken in the past few sessions, albeit, without any forceful continuation. The similarity between the lack of conviction amid U.S. stock indices and the USD/JPY pair suggests limited upside for the dollar. Upside remains limited at 108.45, with ample downside room towards 108.05 and 107.70.
Cable drops another 2¢
Cable slumped by a more than 2 cents to $1.9467 after CPI rose 3.3% in the year ending in May, versus expectations of a 3.2%, showing the highest increase in 11 years. The report confirms the intensifying dilemma of the Bank of England between meeting its mandated government-imposed inflation target of 2.0% and shoring up a deteriorating UK economy. Despite outright inflation, King continues to note there are "good reasons" why price pressures are likely to be temporary. Markets have interpreted the comments that interest rates will not be raised, which is not only negative for the currency from a rate differential point of view, but also from a central bank credibility stance. Indeed, King noted recently that that there may be a “quarter or two of negative growth.” Separately, the Confederation of British Industry's forecasts UK GDP to reach 1.3% next year, its slowest pace in 17 years.
Despite the negative U.S. housing figures, we expect cable’s upside to remain capped at $1.9530, targeting 1.9460 and 1.9430.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
