The latest record in Euro zone inflation at 4.0% annually in June is the latest catalyst to the broadening euro strength and continued dollar weakness. In a week when the European Central Bank (ECB) is expected to raise rates at the same day that U.S. jobs figures are set to show prolonged weakness, dollar weakness remains the order of the day. This is cogently highlighted in the new record high of $143.54 per barrel in crude oil and the latest four-week high of $935.40 per ounce gold.
Considering the ECB decision, U.S. non-farm payrolls, U.S. services and manufacturing ISM surveys, we expect EUR/USD to regain $1.5955, but the $1.60 figure may serve as the line in the sand for USD weakness, at which point we anticipate renewed jawboning from U.S. and European officials. But jawboning does not mean actual USD-supporting intervention, as the fundamentals are exceedingly stacked against the currency, which makes the fruits of an intervention short-lived.
At 9:45 am, Chicago June PMI seen at 48.4 from 49.1, with the subcomponents in new orders and jobs.
EUR rises on ECB, oil, U.S. reports
Euro surged to a three-week high of 1.5836 before retreating on overall consolidation prior to the U.S. open. Aside from the potential of disappointing U.S. data, the European Central Bank (ECB) press conference may sound off a more hawkish tone than anticipated. It may be argued that in order to avoid an excessive euro run-up in the aftermath of Thursday’s rate hike, the ECB would stress on the downside risks to the economy. But the deterioration in European inflation bears reason for persistent hawkishness. Inflation in Germany jumped to 3.3% from 3.0% while that in Spain it surged to as high as 5.1%.
Having breached above $1.58, EUR/USD is expected to face interim resistance at $1.5870. The element of U.S. weakness and jawboning is expected to see the currency taper off at 1.5955. Our long-term perspective continues to expect a rate cut from the Federal Reserve, which will make the $1.60 a likely target in mid next month. Support seen holding at 1.5740, backed by 1.57.
Yen regains risk appetite luster
What may have begun to look like a waning in the inverse relationship between the yen and risk appetite is now eroding as the Japanese currency joins the Swiss franc in rallying against the majors on heightened market pessimism. Last week’s breach in the Dow to two-year lows and the S&P 500’s nearing of the March lows has dragged the indices back into the common definition of a bear market as both are down 20% off their October highs. USD/JPY breaks below the 50-day moving average for the first time since April 22. Our medium-term forecasts of 100 in August, remains intact. We expect a breach of 104.30, to give way to the next key target at 103.70. Upside remains limited at 105.70.
Aussie breaks to new record, RBA awaited
Aussie breaks above its 24-year high of $0.9650 to hit an all time record high of $0.9667 on rising gold, weak USD and expectations that tonight’s RBA interest rate decision (12.30 am EDT) will maintain a hawkish tone towards inflation despite recognizing weakness in most sectors. The RBA is widely expected to hold rates unchanged at 7.25%. Weak consumer confidence, gradually rising unemployment and weak housing figures have not alleviated the central bank’s nervousness, Downside could reach to as low as 0.9540 on persistent U.S. equity declines and post-RBA reaction. In fact, note the daily pattern of the Aussie’s retreat in afternoon U.S. trade, following fresh session highs prior to the close of London trade. Despite support looming as low as 0.9570 and 0.9540, we expect Aussie to retest 0.9640 and 0.9670. Medium term outlook remains for 9.9770 and 0.9830.
GBP capped at $1.9980
Cable rallies as a result of rising oil and weakening U.S. fundamentals, highlighting the divergence from weak UK fundamentals. Comments from members of the Bank of England’s Monetary Policy Committee indicating they considered raising rates earlier this month seem to have shut the door of any BoE easing this year, but our perceived risk of further BoE rate cuts later this year alongside the Fed has more downside room for the pair. Most notable, Governor King remarked the probability of 4.0% inflation while at the same time stated his opposition to putting the economy into recession just to avoid writing letters on inflation.
Key resistance stands at the 200-week MA of $1.9980 and 50-week MA of $1.9930, suggesting that the key pressure point remains at $2.00. We expect GBP to be a major victim of any decline in oil prices resulting from FX jawboning or unexpectedly strong U.S. jobs figures. Note also that the Relative Strength Index is nearing the 67 level, which is the highest level since March 2008. Support starts at 1.9860, backed by 1.9800.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
