Yesterday the US Labor Department reported that consumer inflation rose slightly slower than expected in April as core inflation, which does not include volatile food and energy prices, continued to moderate to its smallest annual gain in a year. Overall prices rose 0.4%, just below the 0.5% increase the market had forecasted. Core prices rose 0.2% in April, in line with expectations. As a result of this marginally softer US inflation figures, which increased the possibility of an interest rate cut later this year, the dollar jumped back onto the bear wagon extending losses against the EUR, which rose to week highs against the greenback. This data supports the Federal Reserves case that slower growth will bring elevated core inflation back inline with price stability without resorting to a rate hike. In other words the Fed is that much closer to removing its inflation bias and we could see a rate cut by the end of the year. Among other news released yesterday the US TIC report, which measures the demand for US debt and assets, came in below expectations at $67.6 billion. Despite the trade deficit for March returning above the $60 billion mark even in the cheap dollar environment with a figure of $63.9 billion, consensus estimates pointed to an even stronger projected TIC figure of $72 billion. This poor figure maximized the dollars' vulnerability to damage stemming from the CPI weakness. Also it seems that problems in the US housing sector are set to continue as it was reported yesterday that The National Association of Home Builders Fargo index of sentiment fell to 30 this month from 33 in April, matching a 15-year low reached in September. A reading below 50 on this index indicates that most respondents view conditions as poor. We can also see that tighter lending standards have made it more difficult for buyers to get home loans and at least 50 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006. Declining prices, coupled with yesterday's reports showing foreclosures are continuing to rise and confidence among homebuilders is slumping, demonstrate that the yearlong housing slump isn't abating.
Today US Building Permits and Housing Starts will be released and are both forecasted to come in lower than there previous months figures and as a result of home builders pessimism we may see both these numbers release very weak. Also due for release today is US Industrial Production which is expected to bounce out of negative territory and come in at 0.3%. If today's housing figures come out poor and industrial production disappoints we will see the dollar slip deeper into the bear's cave and it could once again breach well past the 1.36 level against the EUR.
Yesterday the EUR made significant gains against the USD testing the 1.3610 level. This is mainly due to the growing contrast between US and Euro-zone growth and their respective monetary policies. The GDP figures released from Europe yesterday showed that the economy grew 0.6% from the fourth quarter and by 3.1% year- on- year, beating expectations for more moderate growth of 0.5% and 3.0% respectively. Although these figures were below the fourth quarter's robust 0.9% quarterly and 3.3% annual growth they are nevertheless still strong suggesting that the European market has taken the German VAT increase and the strong EUR in its stride. The GDP data basically put a seal on the expected further 25 basis point interest rate hike to 4% in June and there is a strong possibility that we shall see rates hiked to 4.25% later on in the year.
Today we should see the EUR continue on its bullish path but much depends on how US housing figures will release. The only news expected out of the Euro-zone today are the Consumer price figures and the French Non Farm Payrolls. The recent slight lag in growth should bring about a weaker French NFP whereas consumer prices should release inline with expectations as a result of the strong EUR.
Elsewhere, the GDP picked up against the dollar but remained weak against the EUR after inline inflation figures disappointed a market that had become used to positive surprises from recent UK data. Focus for the UK will centre on tomorrow's release of the quarterly Bank of England Inflation Report, where the central bank will lay out its latest forecasts for growth and inflation and which should give some clue as to when and whether the market can expect a further rise in interest rates.
Yesterday the JPY crosses continued to range trade as a result of high volatility in the Dow Jones Industrial Average thereby limiting trading activity. As a result of the strong relationship between carry trades and the Dow, traders completely ignored the Japanese Machinery Orders figure which released in negative territory at -4.5% and was much lower than the expected figure of 1.6%. This weak machinery orders figure was supposed to extend recent gains of the yen crosses yesterday but it had little effect as a result of Dow volatility and caution by traders ahead of the Bank of Japan interest rate announcement tomorrow. No rate hike is expected but since the current account surplus hit a record high and the CGPI inflation index rose 2.0% to 2.2% year-on-year we could see a strong GDP figure and hawkish comments from the BoJ Governor Fukui at the upcoming monetary policy meeting.
Today the JPY should trade in a tight range ahead of tomorrow's interest rate and GDP release which are expected to cause high volatility in the yen crosses.
Hourly charts on the rebound as the MACD crosses up back above the zero line and the target is set for the resistance at 1.3625. The RSI is scraping the overbought area and the Bollinger bands have widened significantly, 2 indicators pointing the way to further gains on the pair.
The MACD provided a buy signal on the 4H chart yesterday and now we see a contraction of the Bollinger bands. It could mean another breakout is looming - we suggest being aware of the upside potential.
With all intraday indicators neutral and a 3 month high posing as a resistance, looks like we care heading into a day of consolidation. Look for more tests of the highs near 120.50 but for now, we don't' see any room for extension.
The pair looks stable at current levels of 1.2144 but risk is toward the downside as opposed to other USD based currencies. Intraday indicators are neutral and volatility is low. Stay on the sidelines here.
The Wild Card
The pair is still close to its local high near 1.1100, trading near 1.1065 now. Forex traders will look for buying opportunities due to the RSI facing upwards and this despite the slight RSI divergence between the preceding high and now. Still, the market seems ripe for another high.