The Euro reached as high as 1.4246 during overnight trading as an improvement in the Euro-zone manufacturing PMI added to bullish sentiment built from rising commodity prices and equity markets.
Talking Points
• Japanese Yen: Benefitting From Improved Chinese PMI
• Pound: Manufacturing PMI Improves for Third Month
• Euro: EZ PMI At Seven Month High
• US Dollar: GDP On Tap
Dollar Battered As Chinese, Euro-Zone, and U.K. PMI Improvement, Furthers Case For Global Recovery
The Euro reached as high as 1.4246 during overnight trading as an improvement in the Euro-zone manufacturing PMI added to bullish sentiment built from rising commodity prices and equity markets. The gauge of manufacturing activity rose to 40.7 from 36.8 in April which was the biggest increase since record keeping began in 1997. Germany, France and Italy-the region’s largest economies- all saw increases which sent the combined reading to its highest level in seven months. The EUR/USD has cleared resistance at 1.4188-the 50.0% Fibo of 1.6040-1.2326 and is looking to test the 12/29 high of 1.4365.
The improvement in activity will most likely lead the ECB to leave their benchmark rate at 1.00% at Thursday’s policy meeting. However, the central bank is expected to outline its plan for their quantitative easing efforts which they announced at their April meeting. President Trichet stated that they intended to purchase €60 billion in covered bonds, which should help provide liquidity to the region especially in countries like Germany, France and Spain where they are heavily traded. There is a slight chance that the committee could announce additionally efforts which may lead to heavy euro trading as there are still downside risks to growth. Conversely, if policy makers signal that they have come to an end of their easing policy and non-standard efforts, as they see enough sigs of growth in the economy, then we could see further strength for the single currency.
The pound shot over 200 pips higher since the beginning of European trading to reach a high of 1.6433 as improving U.K. fundamental data continues to reinforce the bullish case. The Hometrack housing survey showed that prices were flat in May which was the first time they didn’t decline in a year. The BoE’s quantitative easing efforts have helped thaw credit markets which will most likely lead to them standing pat at their upcoming policy meeting. The central bank has no incentive to take any further action following last month’s surprise announcement that they were adding £50 billion to their bond purchase program. The increase in the U.K. manufacturing PMI to 45.4 from 43.1 helps to strengthen the case that the economy is bottoming. An improvement in new orders to 48.9 from 46.4 is a sign that we could see the sector enter in expansion in the coming months. If we see the GBP/USD reach above the 10/30 high of 1.6675 then it may find staunch resistance at 1.6820- the 50.0% Fibo of 2.0160-1.3494.
The dollar was taken behind the woodshed again overnight as rising commodity prices and a jump in Chinese PMI helped boost risk appetite. The expected rise in ISM manufacturing to 42.3 from 40.1 will be another sign that the global recession is slowing and should continue the current greenback weakness. However, the 0.2% forecasted declines in personal income and spending will raise some eyebrows as it will dim the outlook for domestic growth. Rising confidence has fueled expectations that consumer demand will begin to gain traction, but the half million job losses expected to have occurred in May will cast a shadow on the improved outlook. We could start to see optimism wane as we get closer to Friday’s labor report but as long as signs point toward stabilization in the broader economy the dollar may remain on the run. GM announcing that it will file bankruptcy today and that it will receive another $30 billion in aide could weigh in sentiment but the U.S. government adding to its bailout total adds to a weak dollar story.
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Forex Trading Weekly Forecast - 06.01.09
To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
