Daily Analysis - Manufaturing ISM, Look for the Employment Component

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Economic News

USD

The USD pairs provided traders with nice volatility at the opening of the trading week yesterday, as the dollar opened the week stronger against most pairs, and after traveling a measurable distance in both directions it finally closed the day slightly higher. This volatility came on the back of some contrasting economic releases that came from both the US and overseas, from Europe.

The US data that was released yesterday was rather disappointing. The Core PCE Price Index, one of the Fed's most scrutinized measures, declined 0.3% compared with the previous month and printed at 0.0%. Personal Spending also came lower than the expected 0.5% figure, printing a modest 0.3% increase, while Personal Income actually rose 0.7% on expectations of 0.5%. Combining Personal Income and Personal Spending together, an improvement in the American consumer habits - for the first time in a while consumers spend less than they earn. Should this turn into a trend rather than into a single observation, it could translate into declining inflationary readings that will eventually allow the Fed to cut interest rates by the end of this year.

The ISM Manufacturing Index is scheduled for release today and is expected to remain nearly unchanged at 51.0. This could once again be an optimistic estimate, especially in light of yesterday's disappointing Chicago PMI. The Chicago PMI dropped 8.8 pts from the previous month reading of 61.7, printing very close to the 50 boom/bust level. Markets, however, will pay closer attention to the report's components rather to the plain headline figure and to the employment component in particular, as it might shed more light on this Friday's Non Farm Payrolls report. Strong growth in the employment component of today's ISM manufacturing report, even if accompanied with a slightly disappointing headline figure, might help buoy the dollar from present levels, ahead of this week's NFP.

EUR

The EUR once again traded at its all time high, at 1.3678, although Euro Zone data came rather mixed. German Retail Sales dropped sharply over the past month, falling 0.7% on the back of expectations for a 0.8% increase. Following the release, the EUR continued weakening against the USD, but later reversed direction as M3 Money Supply Growth came out strongly higher than expected, at 10.9%, vs. expectations of 9.8%. The strong M3 growth is a matter of real concern to the European Central Bank decision makers, as higher liquidity creates inflationary pressures, to which central bankers usually react by hiking interest rates. The Euro Zone CPI and Consumer Sentiment that were later released had little impact on the market, as they both came inline with expectations.

Due to Labor Day, there are no releases scheduled from Europe today, leaving the EUR pairs price action to be determined by releases due out elsewhere, such as the US ISM Manufacturing. In the case of disappointing US figures, the lack of liquidity conditions might help the EUR strengthen beyond yesterday's highs, and even scrape 1.37.

JPY

Japanese traders are on holiday this week in honor of the Golden Week. Nevertheless, data keeps flowing from Japan. Today, Average Cash Earnings decreased 0.4% YoY, as was widely expected by the markets. Nevertheless, the JPY continued weakening following the release as the falling wages represent a real risk to private consumption and economic growth.

All in all, JPY weakness is likely to prevail through the week, ahead of next week's BoJ Minutes, that will probably shed more light on the BoJ's officials stance on growth, inflation, and interest rate prospects.


Technical News

EUR/USD

An upsloping channel on the 4H chart suggests a continuation of the uptrend, but probably not before a correction towards 1.36. Intraday oscillators remain bullish, and dailies are no longer over bought.

GBP/USD

The cable bases itself around 2.00 level, but after breaking this psychological barrier it seems that there is nothing to stop this pair from continuing to climb higher. Some more basing here and then towards last week's high, at 2.0130.

USD/JPY

The 120 level seems to once again serve as a significant resistance area, and an ascending triangle is forming. A breakout, potentially 130 pips long is likely to occur to the upside.

USD/CHF

The Daily chart produces a bullish divergence, signaling a possible correction to the upside. Intraday oscillators are also bullish, possible lies at the 1.2160 area, the upper boundary of the channel.


The Wild Card

EUR/GBP

This Forex pair is trapped in a range trade for a while now, and price action has hit the upper boundary of an upsloping channel on the Daily. Along with a negative divergence on the S. Stochastics, we expect seeing a correction towards 0.6770.