The Euro found support from higher German retail sales and Euro-Zone PMI to a high of 1.4088 but has started to consolidate leaving downside risks.
Talking Points
• Japanese Yen: Found Resistance At 97.00
• Pound: PMI Manufacturing Highest Since May 2008
• Euro: German Retail Sales And EZ PMI Improve
• US Dollar: Housing, Manufacturing and Jobs Data on Tap
Euro Finds Support In Gains In German Retail Sales And Manufacturing, Remains Vulnerable Ahead Of ECB Decision
The Euro found support from higher German retail sales and Euro-Zone PMI to a high of 1.4088 but has started to consolidate leaving downside risks. Consumer consumption in the region’s largest economy increased 0.4% in May, as it improved for the third straight month on improving confidence. Yet, the -2.9% decline from a year earlier provides perspective on how deep the economy has contracted. Meanwhile, the final June PMI reading was revised higher to 42.6 from 42.4 which was the slowest rate of contraction in nine months.
Signs that the recession is slowing will allow the ECB to keep rates unchanged at tomorrow’s policy meeting. Credit Suisse overnight index swaps are pricing in 39.8 basis points of a rate increase over the next twelve months which is significantly down from the 73.3 that we saw on June 12th as the theory that the central bank will be the first to begin tightening on inflation concerns is losing steam. Deflationary pressure and considerable downside risks to the economy remain, especially in troubled countries like Spain. Therefore, we could see the downside risks to the single currency increase if President Trichet acknowledges these pitfalls and leaves the door open for a future rate cut. The 20-Day SMA at 1.3988 has remained supportive and unless we see a break below, there is still potential for a test of 1.4340-6/3 high.
The pound has seen choppy price action as it tries to consolidate yesterday’s losses generated by the weaker than expected GDP figures and dollar support. A better than expected PMI manufacturing reading to 47.0 from 45.4 which was the highest since May 2008 provided a brief bout of support as the economy continues to show signs of stabilizing. The GBP/USD losses were stopped by the 20-Day SMA which still leaves potential for further appreciation. However, sterling has steadily declined against the Euro and a break below the technical level could lead to extended losses. A concern for pound bulls will be the 10th straight decline in the index of services which fell 1.2%. The sector accounts for 70% of the economy and unless domestic growth significantly improves the outlook for a recovery will dim.
The dollar has been choppy overnight after yesterday’s gains on the back of the weaker consumer confidence reading. The dollar positive reaction to the fall in risk appetite keeps the correlation relevant in determining future price action. Therefore, we could see greenback weakness following the ADP jobs report which is forecasted to show the economy lost 394K jobs an improvement from -532K in May. The report is an early indicator for the upcoming Non-farm payroll and generally produces a strong initial reaction. The ISM manufacturing report will also impact dollar sentiment and the expected improvement to 44.6 from 452.8 will also generate risk appetite. The improvement in the global cyclical indicator will raise hopes of a global recovery which could pressure. However, a flat pending home sales print and negative construction spending will raise concerns over the housing sector which remains the key to a U.S. recovery and may dampen optimism and lend dollar support.
Will The EUR/USD Fall Below 1.4000? Join us in the Forum
Related Articles:
Forex Options Weekly Forecast
To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
