Last week, the USD was pressured as US Q1 GDP was revised down to -2.9% on an annualized basis. The BoE also pulled back from its aggressively hawkish tone, and Eurozone PMIs disappointed. Despite the soft EUR and GBP fundamentals, the USD was the biggest loser of the three.
Let’s take a look at this week’s key fundamental factors and how they might shape the outlook in the currency markets. Friday is 7/4, Independence Day in the US and will not have any important economic releases. The US NFP will be on Thursday.
1) German Retail Sales (m/m, May) is forecast to rebound to 0.8% after 2 months of contraction. Readings were -0.9% and -0.7% for April and March respectively. If data matches forecast, the EUR should have some intra-session strength. EUR/USD is poised to push above last week’s high of 1.3650, and a strong retail sales data can be the fuel.
2) EUR CPI Flash Estimate (y/y, June) is forecast to be 0.6%. This would still be much lower than the 2.0% target rate, and provides room for the ECB for stimulus if necessary. However, if we do start seeing inflation ticking up, back toward 1.0%, we should see some EUR/USD strength because it would reduce the likely of QE.
3) Canadian GDP (m/m, April) is forecast to be 0.2%. This would be slightly higher than March’s 0.1% reading on the month, and a 2.1% on the year. The CAD has been gaining because the BoC is expected to consider tightening monetary policy in the face of a overheating housing market. Growth that is better than the 0.2% expectation should pressure the USD/CAD further.
4) US Pending Home Sales (m/m May) is forecast to have grown 1.4%, while the April reading was 0.4%. There has been some improvement in the housing sector, but there hasn’t been any consistency. A reading in-line with forecast can start piecing together a better picture for the housing market, but this data is not likely going to have any significant impact by itself.
1) Chinese Manufacturing PMI (June) is forecast to be 51.0, which would be the highest reading this year. Based on recent data, there seems to be some rebound in the Chinese economy after a year of slowdown. Strong Chinese data can help the AUD. The AUD/USD is poised to make new highs on the year, and a reading above 51.0 should help push it along.
2) The Reserve Bank of Australia is expected to hold its official cash rate at 2.50%. Economic data domestically and China (main trading partner), has been better since the previous meeting, and the market is likely looking for some confirmation in the form of a hawkish tone.
3) HSBC Final Manufacturing PMI if unchanged at 50.8 for June, will confirm with the government’s manufacturing data on a rebound at least in production. This can add to AUD-strength this week as it tries to clear into new highs against the USD and JPY.
ADP Non-Farm Employment Change (June) is forecast to show an addition of 206K jobs in June. Jobs data is expected to pick up after Q1. However, data that misses the forecast is likely to have more impact on the USD than data that beats it because the market is hedging against expecting positive data in Q2.
US Factory Orders (m/m, May) is forecast to have contracted, at -0.1%. This would follow a 0.7% reading for April. There is growing concern that Q2 growth will disappoint. After the sharp Q1 GDP revision, poor factory orders can help push along the theme of USD-weakness.
1) AUD Retail Sales (m/m, May) is forecast to be 0.3% after a 0.2% and 0.1% reading in April and March respectively. This is not likely to have as much impact after the RBA meeting and Chinese manufacturing data on Tuesday. A reading of 0.3% or above indicates an improving trend and can add to AUD-strength especially if it follows a technical pullback in AUD.
2) The European Central Bank is meeting to vote on monetary policy. The expectation of QE has been subsiding, and this week’s ECB press conference is shaping up to be a nothing out of the ordinary. Look for the bank to keep options open but hint at some improvements stemming from the ECB’s already loose monetary stance. Because the previous expectation trend has been toward QE, a neutral tone could be considered a hawkish tone, and the EUR looks due for some rally against the USD and JPY after a being pressured throughout June.
3) US Non-Farm Payroll (June) is going to be released early, because Friday is Independence Day in the US. June’s reading is expected to be around 211K, which is slightly lower that May’s 217K reading. Still, it would make it 3 straight week’s above 200K, something we have not seen since the Dec. 2011-Feb. 2012 period. Reading that beat expectation can help USD fight back, especially if it above 220K. However a ready below 200K will disappoint, and will likely hurt the greenback. In addition to the NFP data, the unemployment rate is expected to remain at 6.3%.
The three main questions will be:
1) Will the theme of USD-weakness continue this week?
2) Will the ECB pull back from its dovish tone it had during the past couple of meetings?
3) Will China data start to pick up and return AUD to its 2014-glory?
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