[U][B]Key Overnight Developments[/B][/U]
[B]• Japanese Service Demand Contracts as Commodity Prices Outpace Wages
• Australian Economy Falls Lower Below Trend Growth Rate
• RBA’s Glenn Stevens Signals Rate Hikes Over for 2008[/B]
[U][B]Critical Levels[/B][/U]
The Euro remained range-bound overnight, oscillating around the 1.59 level following the spike above 1.60 during US hours. DailyFX Technical Strategist Jaime Saettele has called for a sustained break above the 1.60 mark to target 1.6325. Support is now seen at 1.5840. Sterling traded marginally lower overnight following the break above psychological resistance at 2.00. Support is now at 1.9810, while resistance remains at 2.0175.
[U][B]Asia Session Highlights[/B][/U]
The pace of rising food and energy prices outstripped wage growth in May, weighing on Japanese service demand: the [B]Tertiary Index[/B] slumped into to -0.2% versus expectations of an equivalent increase. Traders paid little heed to the release as it is largely expected that exports, not domestic demand, will keep the world’s second-largest economy afloat. USDJPY price action remained in a 30-pip range overnight as the pair consolidated loses sustained during the US session.
May’s [B]Westpac Leading Index[/B] validated our expectations, suggesting the economy’s annualized growth rate fell even further below trend growth of around 4% to register at 2.1% (vs. 2.6% in April). The metric failed to elicit a response, fitting in line with the broad theme of economic slowdown long priced into the AUDUSD exchange rate. The pair did react as [B]RBA Governor Glenn Stevens[/B] cemented that rate hikes have concluded for this year, dropping 23 pips 5 minutes into the bank chief’s speech and continuing as low at 0.9764. Stevens said that “the chances of keeping Australia’s inflation rate low over the medium term are good.”
[U][B]Euro Session: What to Expect[/B][/U]
Another busy calendar day is sure to make for a volatile session. On the European front, [B]June Consumer Price Index[/B] releases are expected from Germany, France and the Euro-Zone as a whole. Yesterday saw the final revision of Italian CPI yield annualized inflation at 4.0%, the highest in 11 years. More of the same can be expected this time around, cementing the precarious position of the ECB in the coming months. The bank has been adamant that its focus remains inflation, suggesting a rate hike is due to contain the price level. And yet, Jean-Claude Trichet and company issued a “no bias” reading at their last meeting, suggesting they were not as deaf to calls for supporting sagging growth as they initially appeared. Yesterday’s ZEW survey of analysts’ sentiment declined to the lowest reading since 1992, underscoring the dire state of the economy in Germany and the 15-nation bloc overall. The only way for policymakers to have their cake and eat it too would be if oil prices continued lower. Removing that source of inflationary pressure would open the door for the looming recession to take care of price growth. This goldilocks scenario aside, the policy outlook will continue to remain uncertain, fueling kneejerk volatility in the markets.
Looking to Switzerland, May’s [B]Adjusted Real Retail Sales[/B] figure is expected to recover from recent loses to print at 3.8% versus -9.4% in the preceding month. Underperformance appears likely considering Consumer Confidence tumbled 86.23% since January. Swiss sentiment has suffered as a cooling economy raises concerns about job security all the while high oil prices depress disposable incomes.
The UK offers insight into May’s labor market conditions, with the [B]ILO Unemployment Rate[/B] metric chief among related data releases. Employment is typically the last piece of the recessionary puzzle, with UK unemployment ticking higher in April for the first time since 2006. The jobless rate is expected to remain at 5.3% in May, though a 7-month high in unemployment benefits claims leaves the door open for a downside surprise.
[I] To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]