FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro eventually came under pressure towards the end of the Asia session. But traffic was not all one-way – earlier, an unexpected rate hike from the Bank of Korea along with better-than-expected import data from China briefly kept risk appetite supported. EURUSD traded 1.4484-1.4551 and USDJPY 80.03-80.47. At yesterday’s ECB press conference the need for strong vigilance was duly noted, but apart from a few hawkish hints and minor upward revisions to 2011 CPI, there was precious little on offer to suggest that the ECB is ready to embark on an aggressive tightening cycle. As such, the euro’s reaction was not far off that seen in the aftermath of May’s policy meeting, and given the problems with Greece remain far from resolved, the currency may yet be able to have a look at 1.40 fairly soon. In the US, the US trade balance narrowed to $43.7 bn to reflect weaker imports in the aftermath of the earthquake in Japan. Our economists note that this may boost GDP, but could be offset by weaker domestic consumption. Jobless claims gained to 427k, showing that the US unemployment situation remains challenging.
EUR
Trichet uttered the key “vigilance” word, signalling a hike in July but there was no further ammunition for euro bulls to press their case. He said inflation would likely stay above the 2% target in the coming months and noted that 2011 inflation forecasts now stood at 2.5%-2.7% versus 2.0%-2.6% previously.
However, the midpoint of 2012 inflation forecasts was unchanged. Trichet warned that economic activity would be dampened somewhat due to balance sheet adjustment. This implies that the household, but in particular the banking sector may face challenges ahead, impacting both consumption and credit creation in the near future.
On the sovereign crisis, Trichet said the ECB’s holdings of Greek debt would not be rolled over (and they are legally prevented from doing so), while warning that any form of credit event or selective default would not be acceptable.
Greece Q1 GDP was revised sharply lower to just +0.2% q/q from the flash estimate of +0.8%. That meant that the y/y rate was shifted down to -5.5% from -4.8%. This provides further evidence that the downturn in Greece is more severe than initial expectations.
Different sources continue to give details on the new plans for Greece, with new figures putting the total cost at well above EUR100 bn. In addition, the German Constitutional Court would hear a challenge on the bailout on July 5, according to reports in the German media.
Ahead on Friday, key data include German CPI, and markets are looking for a print of 2.3%.
GBP
As expected, the BoE did not shift policy. We believe Ben Broadbent’s presence on the MPC will not change the vote balance too much. June data on growth and price pressures will be crucial as the MPC weighs the necessity of a near-term move to pre-empt inflation expectations. Industrial and manufacturing production figures are due.
CAD
Canadian labour market data is due today and markets will be looking for a strong print to confirm expectations of outperformance in the domestic economy. We expect the jobless rate to stay at 7.6% while the economy should generate 15k jobs, vs. consensus for 20k.
NZD
RBNZ Governor Bollard spoke again overnight, warning markets had over-interpreted the latest policy statement. He added that he was surprised by the current strength of the NZD.
TECHNICAL OUTLOOK
EURUSD BULLISH Resistance is at 1.4653/97 area, break above which would expose 1.4711. Pull back through 1.4419 would open next support at 1.4333.
USDJPY BEARISH Focus on the initial support at 79.70, break of this would expose key support at 79.57. Resistance lies at 81.01.
GBPUSD NEUTRAL Decline through 1.6325 has turned the model to neutral and exposed support at 1.6286/68 area. Initial resistance is at 1.6473.
USDCHF BEARISH Support is at 0.8327, break below this level would open 0.8300 next. Resistance lies at 0.8500.
AUDUSD BEARISH Break below 1.0510 is required to confirm the bear trend. Initial resistance is at 1.0726.
USDCAD BULLISH Key resistance is at 0.9852, break here would open 0.9910. Initial support is at 0.9697.
EURCHF BEARISH Clearance of initial resistance at 1.2318 is required for a short-term recovery, while support lies at 1.2161 ahead of 1.2108.
EURGBP BULLISH Focus is on 0.8918, move above this level would pave way for gains towards 0.8976. Support lies at 0.8846.
EURJPY NEUTRAL 117.47 and 115.21 mark the near-term directional triggers.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
