FX markets consolidate ahead of Fed minutes, Japan GDP

Forex News and Events

EUR/USD’s last week consolidation is over and we now stand at a turning point. Yesterday EUR/USD debasement - triggered by Benoît Cœuré’s comment saying that the ECB will front-load its purchases of euro-sovereign debts in May and June ahead of an expected poor bond-market liquidity in July and August – was followed by better-than-expected US housing data in April, indicating that the US may be out of the wood. Traders have been eagerly waiting good news from the world’s biggest economy to resume the dollar rally and it therefore explains how rapidly the dollar appreciated. The release of the FOMC minutes will give further details regarding the temporary factors which dampened the economy in the first quarter. We also expect the minutes to give more clarity about the optimism of FOMC members that growth will pick up in Q2. Hawkish minutes will therefore allow the dollar to appreciate further, dragging EUR/USD below 1.10.

However, a few important US data are due this week and may trigger some sharp moves in FX markets. Initial jobless claims and Manufacturing PMI will be released tomorrow and may pause the dollar rally if proved disappointing. Most importantly, April inflation data due on Friday will be decisive – inflation is expected further into negative territory at 0.2%y/y, -0.1% prior – as higher read would increase the odds of a rate hike in September, allowing the dollar to gain momentum.

EUR/USD consolidates above 1.11 ahead of Fed’s minutes. The next key support lies at 1.10 (Fib 50% on April-May rally and psychological level) but may not be strong enough to face dollar bulls.

Japan is fighting for momentum (by Yann Quelenn)

After more than two years of “Abenomics” which includes a massive monetary policy easing and fiscal stimulus, Japan’s annualized GDP printed at 0.6%q/q well above consensus at 0.4% during the night. Other indicators such as GDP Business Spending came in at 0.4% while analyst were looking for 0.2%. At first glance, data seem to be good for Japan that is on its way out of twenty years of deflation. By the way, GDP deflator was up 3.4%y/y, nonetheless below median forecasts of 3.6%.

However, it is worth pointing out the weak GDP Private Consumption. In comparison with the huge easing policy, we wonder how sustainable will be this slight recovery. Indeed inventories suggest that more products remain in warehouses and unsold to consumers which set to be problematic in the mid-term. On the other side, as a result of a weaker yen which increased the cost of raw materials, big local companies like Panasonic decided to repatriate production back home.

After what appeared to be good news, USD/JPY is now trading between 119.50 and 121.10. JPY depreciated as markets are still concerned by growth sustainability and high debt-to-GDP ratio. Nevertheless, the Yen weakness is partly attributable to the recent dollar rally.

EURUSD - Approaching support at 1.1066