Key data from Europe, Japan may help dollar
Swiss International Financial Brokerage Co
The US Dollar probed four-month highs last week but ultimately settled little-changed against an average of its major counterparts. The week’s top two items of interest on the economic calendar – a speech from Fed Chair Powell and April’s CPI report – seemed to reinforce status-quo policy bets. Powell said international spillover will not deter Fed tightening and headline inflation printed in line with forecasts at 2.5 percent.
All this was broadly as expected, stalling trend development and opening the door for a consolidative pause after the greenback’s breakneck gains over the preceding three weeks. The data docket thins out in the week ahead, with April’s retail sales report amounting to the only top-tier item due. Absent a wild deviation from forecasts however, the outcome is unlikely to alter the priced-in outlook.
This is likely to see investors’ focus shifting to a steady stream of comments from current and aspiring Fed officials. Scheduled remarks from eight of the current crop of policymakers are due to cross the wires. Confirmation hearings for Richard Clarida and Michelle Bowman – nominees to the Vice Chair and community banking posts on the Board of Governors – are also on tap.
San Francisco (and soon to be New York) Fed President John Williams and Governor Lael Brainard stand out among speeches from existing central bank officials. The former is a bellwether for the consensus view on the rate-setting FOMC committee while the latter’s recent conversion to a hawkish disposition has already proven to be market-moving, lighting the fuse for the latest US Dollar rally.
The sentiments of Mr Clarida and Ms Bowman will be closely scrutinized as well. If confirmed, both will immediately acquire a vote on current policy decisions. Both are seen as generally in line with the mainstream of US central bank officials. Comments affirming their support for gradual stimulus withdrawal may seen as reinforcing the case underpinning the Dollar’s recent gains and give it another upward nudge.
External influences are also important to consider. CPI and GDP readings from Japan and the Eurozone are expected to produce weaker results. Meanwhile, minutes from the latest RBA meeting will probably strike a dovish tone. In all, that might undercut the case for policy normalization outside of the US and burnish the relative appeal of the US currency versus its G10 FX counterparts.
A roller-coaster ride for GBP over the last month ended on Thursday when the Bank of England kept all policy measures unchanged and downgraded growth and inflation expectations. MPC policy makers also tempered the outlook for rate hikes slightly noting that the costs to waiting for additional information were likely to be modest, ‘given the need for only limited tightening over the forecast period’. One month ago, expectations for a May rate hike ran as high as 82% while the latest expectations for the next 0.25% increase are now around 40% for August and 80% for November.
Looking ahead there is very little UK data released next week with only the monthly jobs and wages data on the slate Tuesday. A pick-up in wages and a reduction in the unemployment rate may give GBP a small boost, pointing towards future domestic inflation pressure although current expectations are in line with last month’s figures.
The direction of GBPUSD ahead is also heavily reliant on the USD which has rallied strongly in the past few weeks and may still point to further cable weakness. Data releases are scarce also in the US next week though leaving both sides of the pair at risk of sentiment moves. The chart below shows that GBPUSD is now trading below its 200-day moving average – a bearish signal - although it is also worth noting that the RSI indicator is languishing in oversold territory.
Japanese Yen pairs saw quite a bit of back-and-forth action this week, with USD/JPY continuing the rangelike behavior from the week prior. GBP/JPY did see some fireworks, although that was more-likely coming from dynamics in the British Pound. While USD-bulls remained in-force into Thursday’s US CPI release, USD/JPY put in another failed test at the 110.00 level. This had also happened last week, thereby helping to produce a double top formation in USD/JPY at a key area of psychological resistance.
There were no high-impact announcements on the economic calendar this week out of Japan this week, and the more noteworthy items came from speeches with BoJ Governor Haruhiko Kuroda. Mr. Kuroda offered comments on a number of topics this week, key of which was a call on the Japanese government to step up structural reforms to allow for a more growth-friendly economic backdrop. This is the third pillar of the ‘Abenomics’ approach to ending the decades-long struggle that the Japanese economy has had with deflation; and this is a part of the strategy that we haven’t seen addressed in some time. Kuroda specifically mentioned that Japan has more work to do on deregulation, and this is likely pointing to a heavily-regulated labor market along with heavily-regulated industries in Japan like healthcare and agriculture.
Of specific interest to short-term dynamics in the Japanese Yen, Mr. Kuroda also touched on the topic of stimulus exit earlier in the week. While the Bank of Japan was nearing a Euro-like scenario earlier in the year, with strong growth in inflation threatening to push the bank away from a massive stimulus program; Mr. Kuroda addressed this head-on when he said that should conditions continue to improve, the BoJ will start to debate stimulus exit. While this may not be an earth-shattering pronouncement, nor did Mr. Kuroda offer any type of outlook as far as timing, the fact that he was willing to touch on this topic speaks volumes. The ECB appeared to try to avoid this as much as possible in 2017, and it merely led to more strength as that omission was taken ominously. It also shows that the BoJ is likely going to remain pedal-to-the-floor until absolutely necessary, and this brings focus on to next week’s data.
As crude oil booked another weekly gain on renewed Iran sanctions that helped breed supply shock concerns. Crude oil traded to the highest levels since November 2014 on both WTI & the global benchmark, Brent at $71.89 and $78/bbl respectively.
The first key support zone comes from a Tuesday morning’s pivot ahead of Trump’s announcement to withdraw the US from the Iran nuclear deal. As false news leaks were reporting Trump would stay in the deal, oil sold to an intraday low of $67.63 for WTI, which aligned with the 50% Fibo of the 2014/2016 range.
After the report came out, Crude traded 6% higher by Thursday to $71.89.
Last week’s low will now be a firm support point to show a higher ground for which the bulls have established confidence in their view.
With price remaining above $67.63/bbl, you may hate the trend, but it’s likely not worth fighting it. Me? I will continue to look for higher prices yet with a bullish target to the 61.8% retracement of the 2014/16 range at $76.99/bbl.