The euro exchange rate complex has started the new week on a solid footing. Yet market conditions are thin with the US and UK on holiday - can the EUR to USD conversion find better form?
The biggest problem facing dollar bulls this week will be the economic data.
Monday is closed in the US but after unimportant personal income and spending data on Tuesday, the calendar moves on to the manufacturing ISM (horrible regional Fed indices sound a warning that a sub-50 headline is likely).
Thursday brings the ADP employment index, and then Friday brings non-farm payrolls, where strike action is potentially a drag and we're looking for a (spurious) slide to 140k.
"The Fed's been talking up the economy, but a data-sensitive central bank's ability to ignore even temporary weakness is doubtful. If the data are solid, fine, but will a shower of soggy data ruin the summer Fed hiking party?" says Kit Juckes at Societe Generale.
The euro was the second worst performer in G10 space in the week past, while the british pound was the best performer.
NZD comes bottom, dragged lower by a dwindling yield premium over the US - it's down to 74bp at 10years, the lowest since July 2006.
The market is split about the June RBNZ meeting, but does expect a further cut in rates this year.
With the dollar rising as a result of heightened interest rate expectations following improved growth data and commentary from Fed’s Yellen, the EUR/USD exchange rate may continue to endure a short-term downside bias.
From a technical perspective EUR/USD may find substantial support at 1.1100 and bounce off that level in the week ahead.
The 200-day moving average and a trend-line which is also the lower border-line of an ascending channel, are both situated at 1.1100.
The exchange rate has reached TD Countdown 13 on the Demark Indicator of the hourly chart, which is a sign the down-trend is reaching exhaustion point.
Longer-term it remains trapped within a broad multi-month range between 1.0460 and 1.1730.
Commerzbank maintain a bearish outlook, despite the closeness of support (the put the channel line at 1.1055), and they see bounces capped in the 1.12s:
“Very near term we look for rallies to remain capped by 1.1280/1.1332, but it is possible that the rally higher is already likely to struggle we note its has failed to make any impression on its first resistance at 1.1216 the 25th April low. The base of the 6 month channel is expected to act as the break down point to the second channel at 1.0562.”
A decisive break below 1.1000 - confirmed by a break below 1.0960 perhaps, would open the way to move down to trough support at about 1.0850.
The 50-day moving average is the ultimate ‘cap’ at 1.1312, as moving averages often present difficult obstacles for price action to move above or below.
Eurozone Inflation in the Spotlight
The two major releases for the euro in the week ahead are May Eurozone CPI and the European Central Bank (ECB) interest rate meeting on June 2.
CPI is expected to recover to -0.1% from -0.2% previously. This could impact on the euro if it fails to recover – or even worsens.
Inflation has dropped to -0.2% for March and April, and if it perseveres in deflationary territory it will begin to put more pressure on the ECB to increase stimulus, to try to lift inflation.
There is a chance inflation could continue to disappoint, as Draghi and co have already warned it could remain in negative territory until the second half of the year, due to the considerable pass-through lag from the low oil prices in Dec 2015 and Jan 2016.
The ECB rate meeting is expected to be “more about implementation” as major monetary policy stimulus has already been out in motion in March, and the ECB have said they want to see the effects before deciding what to do next.
“The ECB is in implementation mode, so Thursday’s meeting should be a straightforward affair. However, the macroeconomic projections will be updated, and are likely to show an upward revision to inflation this year, which will reinforce the ECB’s move to the sidelines for the rest of the year.” - TD Securities.
Outlook for the Dollar
Overall US data will be interpreted through the lens of how it affects Q2 growth. Better data will signify better Q2 growth. A stronger Q2 recovery will mean a higher probability that the Fed will raise interest rates in the summer, and therefore the higher the dollar, because higher interest rates attract more foreign capital from overseas, increasing demand for the buck.
Data just released showed Q1 growth revised up to 0.8% from 0.5% which supported the dollar on Friday.
Janet Yellen’s comments that a “rate hike in coming months may be appropriate,” further supported the dollar, as they were interpreted as indicating a shift in the Fed Chair’s stance to being more open to raising interest rates.
Consumer Confidence, ADP Payrolls and ISM Manufacturing are the big data sets out in the coming week.
ISM Manufacturing is often a large mover of the markets. A fall to 50.2 forecast from 50.8. If it is unexpectedly higher the dollar should gain a strong boost.
The highlight of the week, however, is US is Non-Farm Payrolls (NFP’s) on Friday June 3.
Currently analysts expect payrolls to rise by 164k in May, from 160k in the previous month, which does not seem like a very high bar.
A good NFP will cast off doubts about the labour market after April’s poor result.
Broker TD Securities expect a weaker result:
“The impact from the ongoing Verizon workers’ strike should bias headline nonfarm payrolls lower, with the pace of jobs growth slowing to 145K in May and risks tilting to the downside. The unemployment rate should remain unchanged at 5.0% as a further influx into the labor force offsets the gains in household employment. Wages should post a modest 0.2% m/m gain and the annual pace of average hourly earnings growth should remain unchanged at 2.5% y/y.”
The fall in business investment has also been interpreted as an early warning sign the labour sector could suffer.