EUR/USD Forecast May 2-6

EUR/USD[1] had an excellent week, riding on USD weakness to rally but was contained by tough resistance. Will it bounce or break? . Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.

GDP growth beat expectations with 0.6% q/q in the euro-area. Also the unemployment rate is falling, with 10.2%. However, the ECB’s mandate is seeming less achievable in the short term at least. Inflation fell back to negative territory with -0.2%, below expectations. Also core inflation missed with +0.8%. Nevertheless, the dollar’s poor performance is what drove the pair higher: the Fed is not really into hiking rates soon[2] and the greenback collapsed.

Updates:

EUR/USD daily graph with support and resistance lines on it. Click to enlarge:

EURUSD May 2 6 2016 technical analysis forecast

  1. Manufacturing PMIs: Monday: Spain at 7:15, Italy at 7:45, final French figure at 7:50, final German at 7:55 and final euro-zone number at 8:00. According to Markit, Spain’s manufacturing sector continue enjoying growth in March with a score of 53.4 points, above the 50 point barrier separating growth from contraction. A score of 53 is on the cards now. Italy had 53.5 and 54.1 is now expected. The preliminary read for France in April was 48.3, in contraction territory. For Germany it 51.9 and the whole euro-zone had 51.5. The final data is expected to confirm the initial reads, but revisions are quite common.
  2. Jens Weidmann talks: Monday, 9:30. The president of the German central bank (the Bundesbank) is a critic of the ECB’s extremely loose policy but did go out to defend its actions. How does he see the situation now?
  3. Mario Draghi talks: Monday, 14:00 and Thursday, 10:15. The president of the ECB has come under fire for recent policy but markets want him to do even more. In his speech in Frankfurt, he has the chance of providing more information about the situation and if more monetary easing is needed. The recent rise of the exchange rate is certainly not favorable for his efforts to battle deflation.
  4. PPI: Tuesday, 9:00. Producer prices are also low and this eventually feeds into consumer prices. After a drop of 0.7%, a small bounce of 0.1% is on the cards, but we had many misses in this indicator.
  5. French Trade Balance: Wednesday, 6:45. Contrary to Germany, France has an ongoing trade deficit. A relatively wide one of 5.2 billion was seen last time and -4.2 billion is on the cards now.
  6. Spanish Unemployment Change: Wednesday, 7:00. This monthly gauge of the euro-area’s fourth largest economy is closely watched. The number of unemployed surprisingly dropped by 58.2K in March and another drop of 86.6K is on the cards now, as more tourists flood the country, raising the need for more jobs in this sector.
  7. Services PMIs: Wednesday. Spain at 7:15, Italy at 7:45, final French figure at 7:50, final German at 7:55 and final euro-zone number at 8:00. Spain’s services sector saw nice growth of 55.3 points in this sector in March. A small slide to 55.1 is expected. Italy had 51.2 and 51.3 is expected now in the euro-zone’s third largest economy. The preliminary read for France was 50.8, for Germany it stood on 54.6 and for the whole euro-zone on 53.2 points. The last 3 numbers are expected to be confirmed now.
  8. Retail sales: Wednesday, 9:00. The volume of sales advanced by 0.2% in March. A smaller rise of 0.1% is predicted. Note that the German and French numbers are already out.
  9. ECB Economic Bulletin: Thursday, 8:00. Two weeks after the ECB’s decision[3] we get the data they had in front of their eyes for making their calls. This is somewhat overshadowed by the release of the meeting minutes that were introduced not that long ago.
  10. Retail PMI: Friday, 8:10. Markit’s survey of purchasing managers in the retail sector showed a slide back to contraction in March with 49.2 points. A similar number could be seen now.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar made its way up but was once again unable to break above the 1.1460 level (mentioned last week[4]) and eventually closed lower.

Technical lines from top to bottom:

1.1712 was the high point in August 2015 and remains high in the sky. It is followed by the very round level of 1.15.

1.1460 was a key resistance line in 2015 and 1000 above the multi-year lows. 1.1410 is weak resistance on the way up after working as such in the Spring of 2016.

1.1335 separated ranges in April 2016 and now works as resistance. It is followed by the swing low of 1.1220 in September which is minor resistance now.

1.1140 cushioned the pair in October. 1.1070 served as a clear separator of ranges during February and also beforehand.

1.10 is a round number and significant resistance. 1.0960, which worked in the past as resistance, provided a cushion for the pair in February. 1.0825 worked as support in early March 2015 and should also be watched. This is now a triple bottom.

The post-Draghi low 1.0780 replaces 1.08 as support.  1.0710 is the next support line on the chart after temporarily capping the pair in April 2015.

I am neutral on EUR/USD

While the ECB is clearly disappointed with the rise of the euro against the dollar and consequently against the Chinese yuan, there is little they can do

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Forex Weekly Outlook May 2-6

Draghi’s speech, US ISM Manufacturing PMI, Rate decision in Australia, Employment figures from New Zealand, Canada and the US including the important monthly jobs report. These and more are on our weekly outlook. Join us as we explore these market movers.

Last week The Federal Reserve kept interest rates unchanged[1] but left the door open for a rate hike in June. Fed officials noted the labor market continued to improve, despite the recent slowdown in economic growth. The board was closely watching inflation indicators and global economic and financial developments weighing their effect on US economic conditions. Economists see a 22% chance for a rate rise in June. Is the U.S. economy strong enough to sustain another rate hike?

Let’s start,

  1. Mario Draghi speaks: Monday, 15:00. ECB President Mario Draghi will speak in Frankfurt. He may refer to the recent criticism from Germany that the ECB’s low rates were squeezing savers. Draghi defended this policy of printing money and keeping borrowing costs at rock bottom saying this strategy proves to be affective. Draghi also called on euro zone governments to help get the region’s sluggish economy on a more solid footing through economic reforms. Market volatility is expected.
  2. US ISM Manufacturing PMI: Monday, 15:00. US manufacturing sector regained strength in March, amid a sharp rise in new orders. The ISM index edged up from 49.5 to 51.8 in March. The reading was better than the 50.8 expected by analysts. The employment index declined to 48.1 from 48.5 a month earlier, but new orders soared to 58.3 from 51.5. Furthermore, the prices paid index increased to 51.5 from 38.5 exceeding expectations. March was the first month of expansion in manufacturing activity since August 2015.  The index is expected to decline slightly to 51.6 this time.
  3. Australian rate decision: Tuesday, 5:30. The Reserve Bank of Australia maintained the official cash rate at a record low 2% for a 10th straight meeting. RBA governor Glenn Stevens stated that low inflation may prompt another rate cut to boost economic activity. The decision was widely anticipated. The RBA seemed a bit less worried about the global outlook while domestically the economy is continuing to stabilize following the mining investment boom.
  4. NZ employment data: Tuesday, 23:45. New Zealand’s labor market recovered in the last quarter of 2015 as unemployment plunged to a six-year low of 5.3% from 6% in the third quarter. However, the sharp decline in unemployment was also facilitated by a 0.2% fall in labor market participation. New Zealand work force increased by 0.9% to 2.369 million during the quarter. Analysts expected unemployment to rise to 6.1% and job growth to rise 0.8%. Private sector wages grew by 0.4% , a bit softer than the 0.5% rise anticipated. New Zealand employment market is expected to increase by 0.6% in the first quarter while the unemployment rate is estimated to rise to 5.5%.
  5. US ADP Non-Farm Employment Change: Wednesday, 13:15. U.S. private sector added 200,000 jobs in March, beating forecasts of 195,000. Private payroll figures in February were revised down to 205,000 from an originally reported 214,000 increase.The ADP reports comes ahead of the major employment release from the U.S. Labor Department, which includes both public and private-sector employment. US private sector is expected to add 205,000 new jobs in April.
  6. US ISM Non-Manufacturing PMI: Wednesday, 15:00. The US ISM Non-manufacturing PMI index edged up to 54.5% in March from 53.4 in the previous month, rising more than the 54.1 forecast.  The reading shows the non- manufacturing sector is in expansion for 74 months. However, despite the positive figures Non-manufacturing PMI index has been declining since peaking in July 2015, where the index stood at a multi-year high of 60.3%. The report shows business conditions are mostly positive and that the economy is stable and will continue on a course of slow, steady growth. The non-manufacturing PMI is expected to register a gain of 54.9 in April.
  7. US Crude Oil Inventories: Wednesday, 15:30. Us oil inventories limbed by 2 million barrels last week, reaching an all-time peak of 540.6 million barrels. Oil prices edged up about 3%, hitting new highs for 2016 as the dollar weakened after the Federal Reserve announced it would keep U.S. interest rates unchanged. Analysts expected a rise of 1.4 million barrels. Economists believe the recent rose in inventories is fueled by the weakness on the dollar.
  8. US Unemployment Claims: Thursday, 13:30. The number of Americans filing new claims for unemployment benefits rose last week by 257,000 but remained at a historically low level consistent with a robust labor market. The number of claims increased by 9,000 from the week before, broadly in line with market forecast. The labor market continued to post healthy gains despite worries about the broader slowdown in U.S. economic growth in early 2016.  The number of new claims is expected to reach 261,000 this week.
  9. Canadian employment data: Friday, 13:30. Canada’s labor market created 40,600 jobs in March, reducing the unemployment rate from 7.3% in February to 7.1%. It was the largest monthly increase since October 2015. 35,300 positons were full time, 65,100 jobs were created in the private sector, public-sector positions fell by 2,600, and 74,700 net new positions were in the services sector. The country’s youth unemployment rate crept up 13.4 per cent last month, from 13.3 per cent in February. The report also showed that self-employed positions across Canada increased 22,000 last month, while the net number of employee jobs increased by 62,600.Canadian Job market is expected to grow by only 200 jobs while the unemployment rate is expected to rise to 7.2%.
  10. US Non-Farm Employment Change and Unemployment rate: Friday, 13:30. US monthly employment release showed solid expansion in March with a rise in wages, indicating the economy remains resilient signaling the Fed to proceed with its gradual rate raise plan. Nonfarm payrolls increased 215,000 in March following a 242,000 addition in the previous month. Average hourly earnings edged up seven cents. However, the unemployment rate increased to 5.0% from an eight-year low of 4.9% posted in February, since more Americans continued returned to the labor force, a positive sign of confidence in the jobs market. The Fed has downgraded its economic outlook amid cheap oil prices and the strong dollar, saying it is appropriate for policymakers to “proceed cautiously in adjusting policy.” However the positive figures in March show a positive trend in the US economy. US monthly Job growth is expected to reach 206,000 as the unemployment rate should remain at 5%.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

*All times are GMT.

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EUR/USD: What Can Break The Range? Where To Target? – ANZ

Despite some nice movements, EUR/USD is still in some sort of range, and this is frustrating. Here is what could make the break:

Here is their view, courtesy of eFXnews:

…For markets, the perceived lower boundary of negative policy rates (ECB), maxed out fiscal policy (if you if subscribe to the Reinhart-Rogoff view), and the asymmetric risks facing the FOMC have fostered expectations of ‘policy inactivity’. The EUR/USD has reflected that by being similarly ‘inactive’.

So a key question for currency managers is: where do the risks to a breakout from established trading ranges lie?

Owing to the advanced stage of the US business cycle and perkier core inflation data there in recent months, we continue to see a greater risk of a repricing for higher interest rates in the US than in the euro area.

Growth pillars intact

While the euro has benefitted from guidance that the ECB is, to all intents and purposes, at the limits for negative interest rates, it has failed to break through 1.15, and the ECB has no intention of raising interest rates on a short- to medium-term horizon.

By contrast, we have long been of the view that the FOMC wants to raise interest rates and normalise policy. It just has to do so carefully. Instilling the concept of ‘gradual’ in market psychology has been important in puncturing the early Q1 spike in volatility this year. It has also been important in helping to stabilise the reaction function of other central banks (ie the PBoC). However, gradual means ‘gradual’ and it still does signal an intention on behalf of the FOMC to raise interest rates

So, unless one is of the conviction that the US is headed back into recession or that some exogenous disinflationary shock is about to hit the US economy, then the risk to the US interest rate outlook is either that expectations stay where they are, or that they reprice for higher policy rates.

EURUSD downside risks 2016

In short, therefore, the current period of stability in EUR/USD may prevail for a while longer. But unless we are wrong on the US economy, we do not see the fundamental conditions for a stronger EUR being in place just now and feel that an anticipated improvement in US data during Q2 should bolster the USD’s fortunes.

ANZ targets EUR/USD at 1.10, 1.07, and 1.08 by the end of Q2, Q3, and Q4 respectively.

ANZ forecasts last updated on eFXplus on 4/28.

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UK employees report higher pay reviews in 2016, but average wage rise of only 1.3% signalled

Survey data collected in March and April point to disappointingly weak UK pay reviews in 2016, though wage pressures have picked up slightly compared to 2015.

The representative survey of 3,000 British households, compiled by Markit, using data collected by Ipsos MORI, found that around one-third of all employees had received a pay review so far this year. Of these, one-in-three (34 percent) report their pay to have been frozen this year, while 3 percent are suffering a pay cut. Although 64 percent are reporting their pay to have been revised higher, only 23 percent are reporting an increase of more than 2%.

The survey responses collectively point to employee pay reviews leading to an average pre-tax salary increase of just 1.3% this year, higher than the 1.0% increase signalled for 2015 but below the 1.5% rate recorded in 2014.

Pay reviews in the public sector continue to lag behind the private sector, with salary growth rates of 1.6% and 0.9% signalled respectively, although both are up on 2015.

In the public sector, the proportion of employees reporting a pay cut or freeze rises to 51 percent compared to 28 percent in the private sector. Only 13 percent of public employees indicated that their pay will grow by more than 2% in 2016, but this rises to 29 percent in the private sector.

Particularly weak pay reviews were again reported at the lower end of the pay spectrum. Those earning less than £15,000 per annum are set to see salaries rise by an estimated 0.7%, but this rises to 1.6% for those earning approximately £35-58K, with the highest earners (above £58,000) seeing a 1.4% increase.

UK pay reviews

Q. Has your employer conducted a pay review this year (i.e. since January)? Please choose one answer.

1) No pay review

2) Yes, my pay has been frozen

3) Yes, my pay has been revised upwards*

4) Yes, my pay has been revised downwards*

5) Not applicable

* Subsequent question: Can you please specify to the closest number, the percentage this change has involved?

Source: Markit.

Implied expected pay growth

The above estimates are calculated by weighting the percentages of respondents reporting each pay growth band by the mid-point percent change of each band (e.g. 1 percent is the mid-point for the 0.1-1.99 percent wage increase band). The average of the 5 percent+ pay band is assumed at 7.5 percent and the average pay cut is assumed at -1.5 percent.

2016 data are provisional, based on pay reviews from 600 employees compared to 1,300 in 2014 and 5,700 in 2015.

Source: Markit.

Commenting on the survey, Chris Williamson, Chief Economist at Markit:

“Although employees have so far this year seen pay reviews improving on those received last year, and rising comfortably above inflation, at 1.3% the average increase remains modest and unlikely to be of concern to hawks at the Bank of England, where an inflation rate of 2.0% is being targeted.

“The survey data suggest that low inflation, running at just 0.5% in March and 0.3% in the first two months of the year, appears to be keeping a lid on pay growth for the vast majority (typically over 95%) of employees who remain in continuous employment.

“However, it also appears that tighter labour market conditions mean the average pay review has risen above current inflation. Pay reviews are especially weak at the lower end of the pay spectrum, typically representing lower skilled or poorly experienced workers. Higher earners, in contrast, who are typically higher skilled and experienced, have been awarded relatively higher pay reviews on average. However, even at this upper end of the market the rate of pay increase remains low by historical standards.

“Recruitment agencies report more buoyant pay conditions for those starting new jobs, most likely reflecting the tightness of the labour market. Employers have increasingly had to offer higher salaries to attract staff, as rising employment and dwindling unemployment has limited the number of suitable candidates to fill vacant positions. However, these workers are very much in the minority.”

Private sector pay reviews

Public sector pay reviews

Source: Markit.

Survey excluded those either not currently earning.

Chris Williamson | Chief Economist, Markit

Tel: +44 20 7260 2329
chris.williamson@markit.com

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The original article can be found herehere.Markit are an important source of financial information. Their UK PMI figure for manufacturing, construction and services are carefully watched economic indicators and can move GBP forex pairs substantially on their release.

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Latest five-year socio-economic development plan launched in Vietnam

April saw the National Assembly in Vietnam agree a new five-year socio-economic development plan covering the years 2016-2020. As part of this plan a number of economic targets have been set. This note looks at the targets and attempts to judge how likely the country is to achieve them. But first, we take a look at the latest PMI data on the performance of the manufacturing sector to gauge the current economic situation.

New order growth at nine-month high

Latest Nikkei PMI data, produced by Markit, signalled accelerated growth of manufacturing output and new orders in April, with each rising at the fastest rate in nine months. It therefore appears that the soft patch in the sector around the turn of 2016 has come to an end. Higher workloads encouraged firms to increase employment following a decrease in March. Firms also raised their purchasing activity at a sharper pace.

Vietnam Manufacturing Output

Another index from the PMI survey which saw its pace of change quicken was input prices. Costs rose for the second month running in April, and to the greatest extent for 20 months. Respondents mentioned higher prices for raw materials including steel. Higher costs were often passed on to customers, meaning output prices rose for the first time since September 2014. If these trends continue, we could be seeing an end to the recent lack of inflation in the Vietnamese manufacturing sector and wider economy. The annual rate of change in the consumer price index (CPI) has only recently broken the 1% mark having been subdued for much of the past year-and-a-half.

PMI Price Indices

Latest socio-economic plan announced

Nine economic indicators have been assigned targets for 2020 by the National Assembly, covering topics from GDP growth to urbanisation (table of details available in Appendix 1). We will discuss them below and set out how likely they are to be achieved.

1. Average annual GDP growth between 6.5% and 7.0%

This would represent an acceleration of growth from the previous five-year period (5.9% average), but given that the global economic environment was challenging in 2012 and 2013 such stronger growth could be achievable if supported by an improved global environment, as was the case in 2015 when a 6.7% expansion was recorded. This positive outlook is of course reliant on global conditions remaining stable or improving, any global downturn over the next five years would clearly knock the target off course. Another reason for optimism is that the Trans-Pacific Partnership (TPP) trade agreement should be brought into force within the five-year period, and is expected to be a real benefit for the Vietnamese economy.

2. GDP per capita between $3,200 and $3,500 in 2020

The chances of meeting this target are a little more challenging than the first. GDP per capita in Vietnam in 2015 was $2,109, with an average growth rate over the past five years of 9.7%. If this growth rate were repeated over the next five years it would take GDP capita to $3,350 in 2020, within the target range. However, growth has slowed considerably in recent years (to 2.8% in 2015) and the fact that the target is set in US dollars makes it vulnerable to a strengthening dollar. The Vietnamese dong fell 5.1% against the dollar during 2015, thereby hitting the rate of growth in GDP per capita in dollar terms (an example of this effect is shown in Appendix 2).

3. Industry and Services to account for 85% of GDP in 2020

This target looks some way off at present, with the combined sectors accounting for 68% of GDP in 2015 (28% Industry, 40% Services). Furthermore, the trend does not show a rapid increase in the share of the economy accounted for by these sectors.

Contribution of Industry and Services to GDP

4. Total Social Investment Capital between 32% and 34% of GDP in 2020

This target should be achievable given that it was met in 2015 (32.6%) and the average over the past five years is also within the target range. There is also the opportunity for the state to directly influence the figure given that around one-third of social investment capital emanates from sources related to the public sector (see Appendix 3).

5. State budget deficit of 4% of GDP in 2020

Success in achieving this target will depend to some extent on global economic conditions and the effect they have on the Vietnamese economy. Should conditions be relatively benign the target looks reachable. The target has only been breached four times in the past 15 years, but these include 2013 and 2014 (the latest available data) and so some improvement will be needed to reduce the deficit by the end of the decade.

Government Finances

6. Fall in energy consumption as a % of GDP of between 1% and 1.5% per year

While the data on energy usage can be volatile, the recent trend is in favour of the target being met. In the three years to 2013 (the latest year for which data are available) consumption fell at a faster pace than required by the target. However, before that usage was rising, thereby adding an element of doubt to the optimistic prediction.

7. Urbanisation rate of between 38% and 40% by 2020

Based on recent trends this target looks like it will be tricky to meet. Currently, the urban population makes up 33% of the total (2014 data), and if the proportion continues to rise at current rates it will only be at 37.3% by 2020, short of the lower band required by the target.

Targets 8 and 9: Total Factor Productivity contributing 30% to 35% of growth, with labour productivity increasing 5% per year on average

Limited data availability regarding these targets makes them difficult to evaluate. Labour productivity grew above target (6.4%) in 2015, but below (4.3%) in 2014.

Overall, most of the named targets look to be achievable, particularly if global economic conditions are stable and the TPP comes into effect as planned. The biggest challenges look to be around the proportion of GDP accounted for by industry and services and the rate of urbanisation. Meanwhile, PMI data will provide a useful monthly signal as to how the economy is faring over the five-year period.

Appendix 1

Sources: General Statistics Office, with Markit calculations

Appendix 2

Sources: General Statistics Office, with Markit calculations

Appendix 3

Sources: General Statistics Office, with Markit calculations

Andrew Harker | Senior Economist, Markit

Tel: +44 149 1461016
andrew.harker@markit.com

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The original article can be found herehere.Markit are an important source of financial information. Their UK PMI figure for manufacturing, construction and services are carefully watched economic indicators and can move GBP forex pairs substantially on their release.

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EUR/USD To Dip N/T; Buy The Dip For A Continued Rebound In H2 – Danske

EUR/USD is on a roll following the Fed meeting[1]. This may be the right direction, but not instantly.

Here is their view, courtesy of eFXnews:

Arguments for a 1-3M dip in EUR/USD… A key argument for a EUR/USD dip near term is the potential for a temporary revival of relative rates, not least due to the fact that positioning is much closer to neutral. Also, a cyclical situation set to evolve in favour of the US in coming months and the risk of a ‘Brexit’ also suggests to us that the cross could be vulnerable on a 3M horizon. Return of relative rates as an FX-market driver At the start of the year we argued that despite the Fed having initiated a hiking cycle, we saw limited potential for tighter US monetary policy to send EUR/USD lower due to very stretched short EUR/USD positioning; the reasoning being that when investors are already positioned in one direction, the arguments (e.g. moves in relative rates) to add to this position most be increasingly strong

While EUR/USD has indeed edged higher since the New Year, we are now in a situation where positioning is much closer to neutral for the cross overall. At the same time, the pair has, in our view, gone a little too far considering recent moves in not least relative rates, both judged against moves in a 2Y swap and 10Y government-bond spread perspective.

In addition, our rate strategists look for US short-end yields to move higher ahead of September, when we expect the next Fed hike to be delivered. Currently, the market is pricing a mere 60% probability of this and thus we expect to see US money-market rates edge higher in coming months as it becomes clear that the Fed is ready to continue its tightening cycle. That said, a move in relative rates should come primarily from the US leg as we look for EU rates to evolve broadly in line with market pricing near term: notably we see limited potential for more downside to the short end of the EUR curve as almost another 10bp cut from the ECB is priced by January 2017, which seems fair given that we think the ECB will stay away from the quick fix of using the rate/currency channel aggressively to foster inflation and prefer QE for now

On the whole, we thus see EUR/USD giving in on the downside to impulses from relative rates moving in favour of USD on a 1-3M horizon as positioning leaves room for this factor to play a role again for a while. Cyclical situation favouring US in 3M US data surprises have turned negative lately while the opposite has been the case for the euro area, but our quantitative cyclical model, MacroScope, suggests that the US cycle will improve on a 3-6M horizon, whereas the opposite could be the case for the euro area. This should make the Fed more confident in continuing the hiking cycle and thereby strengthen the case for USD tailwinds in the short term.

On a 6-12M horizon, the macro picture is set to be less USD-supportive as a significant pick-up in euro-zone inflation looms.

EURUSD decoupling H2 2016 forecast

Brexit risk to weigh on EUR/USD…While Brexit fears have eased a little recently judging from the move higher in GBP crosses and in the pricing of GBP puts, this is a theme that will likely come to the fore repeatedly in the coming months and affect the single currency as well, depending on how opinion polls evolve. In the event of a Brexit (not our base case though) EUR crosses will likely be dragged down short term by the political and economic uncertainty this would generate and by the chances that the ECB would most certainly need to ease in this case. We see EUR/USD below 1.10 in this case. However, we stress that the ECB would likely use QE rather than rates also in this instance, which should dampen the EUR-negative impact of a possible ‘Brexit’.

In any case, ‘Brexit’ fears essentially serve to reinforce the case for EUR/USD downside ahead of the 23 June referendum no matter the eventual outcome. Be careful arguing from oil and risk at present We note that our Short-Term Financial Model (STFM) for EUR/USD suggests that a good deal of the move higher in the cross in recent months has been warranted with a current estimate of 1.12 as ‘fair’. This hints at some but still rather limited downside potential. However, as both the impact of oil prices and risk sentiment, which are key drivers in our STFM framework, are highly unstable drivers of the cross at the moment, we remain somewhat cautious in using the model as a firm indicator for direction in the present situation. Notably, higher oil prices are not necessarily EUR/USD-positive as has been the case in the past, and as the EUR has in recent years occasionally exhibited.

EUR/USD: Direction & Trade Strategy 

These factors taken together thus imply that we see the potential for a temporary revival of notably relative rates to send EUR/USD lower, providing clients looking to scale into a long EUR/USD position with a likely window of opportunity to enter this on a 3M horizon. 

Thus, in our view, the direction for EUR/USD is still higher following a short-lived come-back of relative interest rates dragging in the other direction, and clients with 6M and beyond perspective should continue to look to buy the cross on dips.

FX Strategy: We still project EUR/USD at 1.18 in 12M but stress the risk of a dip towards and possibly below 1.12 in 1-3M. We thus recommend clients to use any near-term sell-off in the cross to position for a continued rebound in H2.

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Fed On Hold Through 2016 & 2017; Staying Long EUR/USD – BNPP

The Fed said its word[1]: on one hand it did acknowledge some improvement in the global economy but without any hints of hikes, the dollar fell. What’s next for the greenback especially in comparison to the common currency?

Here is their view, courtesy of eFXnews:

The FOMC made only incremental changes to its policy statement on Wednesday, leaving forward guidance unchanged. The statement signalled a reduction in concerns relating to the external environment, with language about global economic and financial risks dropped.

However, the statement also acknowledged that, while labour market conditions and household real income have improved further, overall activity and household spending appear to have moderated. Overall, the mixed message has done little to shift the market towards increased pricing for a near-term resumption of Fed hikes.

The Fed’s continued willingness to signal steady policy even as the risk environment and inflation expectations improve leaves the USD vulnerable, particularly vs. the current account surplus currencies.

We continue to think that near-term momentum in economic activity and uncertainty will keep the Fed on hold for some time. In our view, the Fed is likely to keep rates on hold throughout 2016 and 2017.

We remain long EURUSD.

*BNPP maintains a long EUR/USD from 1.1290 targeting a move to 1.16, with a stop at 1.1140.

EURUSD May 2016 looking for upside maybe

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Bank of Japan holds off from further stimulus despite economic woes

Official data confirmed the poor start to the year suffered by Japan’s manufacturers. Data from the Ministry of Economics, Trade and Industry (METI) recorded a 1.0% drop in manufacturing output over the first quarter, corroborating Nikkei PMI data which have shown a deterioration in business conditions in the sector.

Although output rose 3.8% in March, the improvement failed to fully offset the 5.3% decline seen in February. The PMI data also suggest the March upturn in the volatile official data is merely noise in a downward trend. The ‘flash’ reading of the PMI for April slipped to 48.0, its lowest since January 2013.

The official data also showed a 2.1% drop in goods shipments over the first quarter as a whole, which was the largest drop since the second quarter of 2014.

Inflation data meanwhile disappointed. Consumer prices fell 0.1% on a year ago in March, with core inflation (stripping out food but not oil) down 0.3% and registering the steepest decline for three years.

Much of Japan’s woes can be traced to the exchange rate, which has appreciated sharply over the past six months despite stimulus measures from the Bank of Japan, which included the surprise move to negative interest rates in Japan. The appreciating yen has hit exports (the flash PMI showed the largest drop in export volumes since 2012) while simultaneously pulling down inflation by bringing down prices for imported goods.

The decision by the Bank of Japan to hold policy at its April meeting therefore surprised the markets, leading to a further 2% surge in the yen. The central bank appears to be either hoping that business confidence is set to revive on the back of prior stimulus measures, or is perhaps keen to avoid micro-measures, preferring less frequent policy ‘bazookas’ such as January’s introduction of negative interest rates. The latter seems more likely, as the bank is also revising down its current fiscal year growth forecast from 1.5% to 1.2%.

Manufacturing output*

*uses April manufacturing PMI Output Flash Index

Strengthening yen

Sources for charts: Nikkei, Markit, Thomson Reuters Datastream.

Chris Williamson | Chief Economist, Markit

Tel: +44 20 7260 2329
chris.williamson@markit.com

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The original article can be found herehere.Markit are an important source of financial information. Their UK PMI figure for manufacturing, construction and services are carefully watched economic indicators and can move GBP forex pairs substantially on their release.

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US official data corroborate survey signals of stalling first quarter growth

US economic growth slowed sharply to a near stand-still in the first quarter, and early signs indicate that the malaise extended into the second quarter.

On an annualised basis, the rate of growth of gross domestic product weakened from 1.4% in the fourth quarter to 0.5%, according to the first ‘advance’ estimate of official data from the Commerce Department. That means the economy grew by just 0.1% between the fourth and first quarters, indicating that the pace of expansion almost ground to a halt. The expansion was the weakest seen for two years.

In the detail, all main parts of the economy slowed with the exception of the housing market, the latter probably reflecting low mortgage rates. Business spending fell at the fastest rate since the second quarter of 2009, dragged 5.9% lower by cost cutting in the energy sector in particular. Consumer spending growth also slid from 2.4% to 1.9% and exports fell at a 2.6% pace.

The picture is somewhat confusing because official GDP numbers appear prone to weakening in the first quarter (see chart), raising suspicions that the data have not fully accounted for seasonal trends in recent years. Survey data support this theory, but also indicate that this time the first quarter weakening is not to be brushed off as a statistical quirk.

Markit PMI data correlate closely with GDP, but do not suffer from the same volatility as the official data. A steep downturn in the February PMI data had signalled a heightened risk of the economy stalling – or even contracting – in the first quarter, but a small upturn in the survey data for March meant the surveys recovered to signal marginal first quarter growth.

Note that at the time of the February release, and right up until mid-April, the consensus was for 2% first quarter GDP growth.

US GDP data highlighting first quarter weakness plotted against PMI survey data

US GDP data smoothed to remove volatility plotted against PMI survey data

The first quarter slowdown is also by no means limited to the US, with surveys showing that the global economy grew at its weakest rate in over three years in the first three months of the year. It is therefore by no means surprising that net trade is acting as a drag on the economy, especially given the recent strength of the dollar.

Worryingly, the surveys indicate that the malaise affecting the US economy has extended into the second quarter, albeit with the pace of expansion picking up slightly to 0.8%. While the upturn in the April survey data is welcome news, the subdued rate of growth signalled suggests the economy remains in a fragile state. Survey respondents blame weak global demand, the strong dollar, the energy sector’s recent plight and growing uncertainty about the presidential election as factors behind the recent slowdown.

The surveys also show weakness spreading from manufacturing to services in recent months, in a sign that consumer demand is being hit by worries relating to uncertainty about the economy, rising interest rates and a nascent recovery in oil prices.

With the Fed facing only a small window of opportunity to hike interest rates before the election, such disappointing data for the second quarter could raise the likelihood of any rate hike being pushed out until December, meaning the business survey data for May could be all-important for the Fed.

To find out more contact economics@markit.com.

Chris Williamson | Chief Economist, Markit

Tel: +44 20 7260 2329
chris.williamson@markit.com

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The original article can be found herehere.Markit are an important source of financial information. Their UK PMI figure for manufacturing, construction and services are carefully watched economic indicators and can move GBP forex pairs substantially on their release.

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Brazil’s central bank refrains from loosening policy amid strong inflation

As widely expected by financial markets, Brazil’s central bank kept its benchmark ‘SELIC’ rate unchanged at 14.25% following its April meeting – its highest mark in almost ten years. Interest rate policy is being steered by the need to curb inflation without damaging an already-troubled economy. Consumer prices rose 0.43% in March, below February’s reading of 0.90%, but contributing to a 12-month cumulative reading of 9.39% which is well above the central bank’s upper limit of 6.5%. GDP is forecast to shrink at a sharper rate in 2016, after plummeting 3.8% in 2015.

COPOM members make unanimous call

For the first time in six months, all members of the monetary policy committee voted for the benchmark rate to be kept at 14.25% as concerns towards the nation’s economy and inflation linger. In the previous three meetings, some members had opted for a rate hike to quell inflation.

The SELIC rate was last raised in July 2015 as policy makers attempted to curb skyrocketing inflation, which was at 9.56% at the time.

Brazil’s official inflation rate – IPCA Consumer Prices Index, reported by the IBGE – posted 9.39% on a 12-month cumulative basis in March (2.62% in the year-to-date). This latest reading is the lowest since June 2015, although remains well above the central bank’s upper-limit target of 6.5%.

Recession set to deepen

Brazil’s GDP shrank 1.4% on a quarterly basis in Q4 2015, dropping at a record rate of 3.8% in the year as whole. Worryingly, PMI data suggest that the economy is yet to hit rock bottom. The Markit Composite PMI Output Index, which combines data from the manufacturing and dominant service sectors, averaged 41.7 in the first quarter of 2016, down from 43.7 in the preceding period. Severe downturns in activity have been recorded in manufacturing and services, with the latter seeing the sharpest drop in output in the history of the series during February.

Even worse, the labour market has been severely hurt by the economic and political crises. Services employment plunged at a record pace in February as businesses attempted to slash costs as part of efforts to remain afloat.

Manufacturing and Services (with Composite) PMI data, published on May 2nd and 4th respectively, will provide further insight into the country’s economic performance and likely changes in monetary policy.

Pollyanna De Lima | Economist, Markit

Tel: +44 149 146 1075
pollyana.delima@markit.com

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The original article can be found herehere.Markit are an important source of financial information. Their UK PMI figure for manufacturing, construction and services are carefully watched economic indicators and can move GBP forex pairs substantially on their release.

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