Risk sentiment was hit yesterday following a report the US is considering imposing restrictions on another Chinese firm. In the FX sphere, the safe-havens yen and franc gained due to the risk-off trading, while the euro traded slightly lower against the dollar, with its traders waiting for Eurozone’s preliminary PMIs for May. The pound was the main loser, as pressure on UK PM May to step down continues to increase.
The dollar traded higher against most of the other G10 currencies on Wednesday and during the early morning Thursday. It gained the most against GBP, CAD and NZD in that order, while it underperformed against CHF, JPY, SEK. The greenback traded virtually unchanged versus NOK.
Yesterday, we got the minutes of the latest FOMC meeting, but the market reaction was muted. In our report yesterday, we noted that that bearing in mind that the meeting took place ahead of the latest escalation in trade tensions between China and the US, the information may be outdated, and the market seems to agree with us. Just for the record, the minutes showed that the Fed’s “patient” approach on monetary policy could remain appropriate “for some time”, and that many policymakers agreed that the recent softness in inflation could be attributed to idiosyncratic factors, which could have only transitory effects. All this is inline with the message we got from Chair Powell at the press conference following that meeting.
It seems that market participants remained focused on developments surrounding the US-China sequel, as well as Brexit (See below). The performance of the G10s suggests that risk appetite eased again at some point yesterday. Indeed, while major EU bourses were mixed yesterday, US indices closed in the red, with the negative sentiment rolling into the Asian trading today. Japan’s Nikkei 225 and China’s Shanghai Composite slid 0.62% and 1.36% respectively.
The trigger for the switch back to “risk off” may have been a report saying that, following Huawei, the US is considering imposing restrictions on another Chinese firm. Remember, yesterday we were reluctant to trust a long-lasting recovery in investor morale, despite the somewhat supported risk appetite on Tuesday, and the new developments prove us right. We stick to our guns, and repeat for the umpteenth time, that we would like to see concrete “truce” signs before we get confident on a healthy recovery in the broader risk sentiment.
Back to the currencies, the euro was found slightly lower against its US counterpart today, with its traders awaiting for the preliminary PMIs for May from several European nations and the Eurozone as a whole. The bloc’s manufacturing PMI is expected to have risen somewhat, but to have stayed below the boom-or-bust mark of 50. Specifically, the index is expected to have risen to 48.2 from 47.9. The services PMI is forecast to have increased as well, to 53.0 from 52.8. All this is likely to drive the composite index slightly higher, to 51.7 from 51.5.
At the latest ECB policy meeting, Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the Euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, although the PMIs would still be far from exciting (according to the forecasts), they could lessen further the need for additional policy measures beyond the new round of TLTROs, especially after the rebound in GDP growth during the first quarter of this year.
EUR/USD could rebound somewhat on the slight improvement in PMIs, but we don’t expect the recovery to last for long. As we noted yesterday, the path of least resistance for the dollar seems to be to the upside, despite the increased bets over a Fed cut by year end due to the US-China latest round of tensions. Perhaps market participants believe that the US economy has more chances than other economies to withstand a trade war, and that’s why they look for safety into the greenback. Even when risk aversion eases, the dollar performs relatively well. Perhaps this is because the probability for a Fed cut declines as investors see increasing chances for the economy to perform even better.
The euro is not showing any good performance against the US dollar lately. EUR/USD continues to slowly drift lower, trading below one of its tentative downside lines, drawn from the high of April 17th. At the time of the analysis, the pair is testing its key support area, at 1.1145, which held the rate from sliding lower this week. But given the current USD strength, there might be a chance to see another move lower, hence why we will remain somewhat bearish, at least for a while.
A drop below the 1.1145 zone could send the pair a bit lower, to test the 1.1135 hurdle, marked by the low of May 3rd. If the rate depreciation continues, EUR/USD could make its way to the 1.1110 area, which acted as good support on April 26th. The pair might rebound from that area back up a bit, but if the bears are still feeling stronger than the bulls, EUR/USD could experience another leg of selling. Such a move may push the pair below the 1.1110 hurdle and send it to the 1.1075 zone, marked by the low of May 18th, 2017.
Alternatively, a strong push back up and a break of the 1.1185 barrier, marked by the intraday swing low of May 9th and the high of May 17th, could lead to a slightly bigger correction. The pair might then also climb above the 1.1195 obstacle, a break of which could lift the rate to the 200 EMA on the 4-hour chart. EUR/USD might stall around there, but if that is not enough for the bulls, slightly above the 200 EMA sits another potential resistance level, at 1.1225, which marks the highs of May 15th and 16th.
The pound was yesterday’s main loser, with uncertainty surrounding the UK political landscape being the only game in town. Yesterday, we got the UK inflation data for April, but as was expected, they passed unnoticed. It seems that GBP-traders kept their gaze locked on Brexit. Just for the record, the headline CPI accelerated to +2.1% yoy from +1.9%, but missed estimates of +2.2%, while the core rate held steady at +1.8% yoy, instead of ticking up to +1.9% as the forecast suggested.
With regards to politics, following UK PM Theresa May’s failure to convince lawmakers over her “new offer”, reports yesterday suggested that there is a new push to oust her as early as Sunday, the last day of the EU Parliament elections. There were even reports saying that Theresa May will resign tomorrow, after the UK holds its EU elections. According to a yesterday poll, Nigel Farage’s Brexit Party is set to gain 37%, while the Conservatives are in fifth place with just 7%, something that would only add to the already elevated pressure on May to quit.
As for the pound, we still see a downtrend. The currency could rebound somewhat as soon as May officially quits, but this is likely to stay limited and short-lived. It could be a “dead-cat bounce”, a “buy the fact” reaction due to some short-covering before the next leg down. The new Prime Minister may have to start from zero again, and will have much less time to deliver. Having also in mind EU’s stance that they will not renegotiate a new deal, as well as that Boris Johnson, who is a hardline Brexiteer, is the front-runner for replacing May, the probability for a no-deal Brexit remains decent we believe.
GBP/AUD continues to move lower, trading below its short-term tentative downside line drawn from the high of May 6th. At the same time, the rate is currently below the 200 EMA on the 4-hour chart, which could also be seen as a negative sign. But the pair is still struggling to stay below the 1.8370 hurdle. For now, we will remain cautiously bearish and wait for a confirmation break and a close at least of a 4-hour candle below that level, before we get excited about possible further declines.
As mentioned above, a drop, and ideally a close, below the 1.8370 support could open the door to some further declines, which may send the rate further down to test the 1.8300 hurdle, marked by the low of April 30th. The pair could stall there, or even rebound back up a bit, but if it continues to trade below the 1.8370 zone, this could result in another selling activity, which might push GBP/AUD lower again, possibly bypassing the 1.8300 obstacle and aiming for the 1.8245, marked by the inside swing high of April 23rd.
On the other hand, if GBP/AUD reverses to the upside and drives above the 1.8440 barrier, this could lead the pair a bit higher. Still, we will consider the upmove to be a temporary correction, where the rate could climb to the 1.8500 hurdle, or the 1.8537 level, marked by the intraday swing high of May 17th. Near the last level the pair could get a hold up, as it would meet the aforementioned downside line as well, which may provide some additional resistance.
Apart from Eurozone’s PMIs we also get the minutes of the latest ECB meeting. However, given that Draghi clearly noted that the Council just had a consensus on the need of further analysis with regards to whether further action is needed, we don’t expect any material information to come out from the minutes. “We need further information that will come to us between now and June,” the ECB Chief said. Thus, we believe that investors will pay more attention to the PMIs, in order to assess what kind of announcement we may get in June.
We get preliminary Markit PMIs for May from the US as well. The manufacturing PMI is expected to have ticked up to 52.7 from 52.6, while the services index is expected to have risen to 53.2 from 53.0. That being said, as we noted several times in the past, the market tends to pay more attention to the ISM PMIs, which will be released on June 3rd and 5th. New home sales for April are also on the agenda, and the forecast points to a 2.7% mom slide following a 4.5% increase in March. Initial jobless claims for the week ended on May 17th will also be released and expectations are for a small increase, to 215k from 212k.
As for tonight, during the Asian morning Friday, we get Japan’s National CPIs for April. No forecast is available for the headline rate, while the core one is anticipated to have ticked up to +0.9% yoy from +0.8%. Both the headline and core Tokyo rates for the month have risen by more than anticipated (to +1.4% yoy and +1.3% yoy respectively), which tilts the risks for both the National prints to the upside.
As for the speakers, we have five on the agenda: ECB Governing Council member Ewald Nowotny, Richmond Fed President Thomas Barkin, Atlanta Fed President Raphael Bostic, San Francisco Fed President Mary Daly, and Dallas Fed President Robert Kaplan.
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