FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar continued to weaken during the Asia session, ahead of today’s FOMC decision and the much anticipated inaugural post-meeting press conference. EURUSD traded 1.4626-1.4714, USDJPY 81.27-81.78. We think the most likely outcome is one where the FOMC and Chairman Bernanke more or less reiterate the March statement, and postpone any final decision on QE2 until the June 22 meeting. The latest Fed central tendency projections should also be released with the decision. Asian equities pushed higher after earlier gains in the US session following a series of mostly positive corporate earnings reports. Gold continues to recover and US Treasury notes are higher too, suggesting the market sees little risk that QE2 will be cut short at today’s meeting.
The S&P/Case Shiller Home Price Index and the Conference Board Consumer Confidence Index were largely as expected, though the Richmond Fed manufacturing index was the latest regional index to unexpectedly dip. Durable goods are due ahead of the Fed’s decision and the 5y Treasury auction has been moved to 1530 GMT. Treasury Secretary Geithner said the US will never seek to weaken the dollar and that a strong dollar is in the US’ interests, echoing recent sentiments by ECB President Trichet.
EUR
The euro shrugged off Eurostat’s latest upward revision to Greece’s debt-to-GDP ratio, which took the 2010 debt level up to 142.8% of GDP from 127.1% in 2009. Clearly Fed policy remains firmly in focus and Eurozone sovereign risk is, for the moment at least, a matter of secondary importance.
German Government advisor Feld said that Greece cannot avoid debt restructuring. Feld is a member of the council of economic advisors, and not a member of the government, so his view does not reflect an official German position.
Spanish T-bill auctions were generally well received but the yield increased compared to previous auctions with the 3-month increasing to 1.371% and the 6-month to 1.867%.
JPY
S&P affirmed Japan’s rating at AA-, but lowered the outlook on the rating to negative from stable, citing fiscal concerns over the cost of the post-earthquake rebuild. USDJPY pushed about 35 pips higher on the news, before partially settling back down as the session wore on.
Post-earthquake economic data continues to deteriorate. Retail sales in March fell -8.5% y/y (cons. -6.1%), the biggest annualised drop since 1998.
GBP
The advance Q1 GDP figure is due and our UK economist is looking for +0.4% q/q, +1.70% y/y, slightly below consensus but higher than Q4. A print below +0.7% q/q could put a potential May rate hike in jeopardy. Rate expectations have already come off but sterling could be further disappointed should GDP push out rate hikes.
The UK CBI manufacturing data was softer with the order book balance -11 (cons. +3) in April vs +5 in March. Export optimism, one of the key markets helping UK manufacturers according to the BoE came in at 6, weaker than March’s 18.
AUD
AUDUSD shot through 1.0850 after Q1 CPI came in much stronger than expected, rising +1.6% q/q (cons. 1.2%) and +3.3% y/y (cons. 3.0%). Our Australian economists do not think the upside surprise will alarm the RBA unduly, and they maintain their view that the next rate hike will probably come in August.
TECHNICAL OUTLOOK
EURUSD heads towards 1.4736/76
EURUSD BULLISH Following the break of 1.4685 the pair now heads towards 1.4736/76 area. Support lies at 1.4500.
USDJPY BEARISH Push below 81.55 has exposed 80.89, while resistance is at 82.43.
GBPUSD BULLISH Look for gains towards 1.6553/99 area ahead of 1.6672, while support at 1.6387 is intact.
USDCHF BEARISH The decline today took out 0.8700, support level, to expose 0.8665. Near-term resistance is at 0.8893.
AUDUSD BULLISH Climb through 1.0845 has exposed 1.1000. Near-term support is at 1.0677.
USDCAD BEARISH Support is at 0.9455/46 area, while resistance at 0.9600 holds.
EURCHF BEARISH Targets 1.2730 key support; a break here would pave the way for weakness towards 1.2624. Initial resistance is at 1.2880.
EURGBP BULLISH Focus is on 0.8924/42 area; next resistance at 0.9000. Support lies at 0.8800.
EURJPY NEUTRAL 120.39 and 118.27 mark the short-term directional triggers.
SCHEDULE
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