All eyes on the US economic data as the dollar approaches key levels

Macro Outlook

It appears that central bank monetary policy forward guidance is not as certain as perhaps the market would want. Or at least that is the assessment how Mark Carney, the Bank of England’s “unreliable boyfriend”, is doing. The UK’s path to monetary tightening is an uncertain one. Having given a fairly strong hint to the market that a rate hike by the end of this year is a very real possibility, Carney has backtracked significantly following the drop in UK inflation to 1.5%, citing low wage growth and productivity. If it was not before, sterling will certainly now be data dependent at least for the rest of the year. In the US, Janet Yellen will speak at the IMF on Wednesday and already having made her own school girl error in her first FOMC press conference, do not expect her to make the same mistake as Carney. She recently dovishly said that she was choosing to ignore the “noise” of US inflation moving back to the Fed’s target of 2.0%. Furthermore, coming in front of Non-farm Payrolls it is unlikely that she will waver from her dovish stance. I would expect much of the usual toing of the dovish line and no change to the given Fed line of guiding the market for tightening in Q2 2015.

Must watch out for: Non-farm Payrolls

Impact: Thursday could be incredibly volatile, as if the services PMIs and the ECB monetary policy are not enough to cope with, there is also Non-farm Payrolls which are released a day early due to the 4th July public holiday. The huge disappointment of US Q1 GDP will put added pressure on payrolls this week, which will need to stay above 200,000 to maintain a sense of momentum in the jobs recovery. The recently embattled greenback needs some good news, and dollar bulls might take some hope from the fact that the Payrolls have beaten forecasts for the last four months.

Foreign Exchange

Any dollar bulls out there will have been tearing their hair out recently with the disappointing final reading of Q1 growth and tepid data on housing and consumer sectors. The decline in the Dollar Index has resulted in huge support levels coming under threat on both the Japanese yen and Swiss franc, whilst Cable is looking to sustain a move above the pivotal $1.7000. Although the Euro has made some gains, it has lagged the gains that other major currencies have made. In fact, over a 3 month period the Euro is the worst performing major currency again the dollar (the Canadian loonie and Sterling are ranked first and second). This will come as little surprise with the ECB’s loosening of monetary policy. This week could therefore be huge for the euro, and flash CPI could give the euro a boost if the trend of improvement in German regional CPIs is tracked across the rest of the Eurozone.

WATCH FOR: A massive week for forex majors. Monday’s Eurozone flash CPI is followed by the manufacturing PMIs. The US dominates Wednesday, with the ADP employment data and Janet Yellen speaking at the IMF. Thursday is the big one though with services PMIs, the ECB monetary policy update and then Non-farm Payrolls a day early.

Indices

With investors apparently shifting back into fixed income over the past week, the equity markets have suffered and the bull run that has seen markets such as the DAX and the S&P 500 pushing into all time highs is just wavering slightly. Could this be the beginning of a corrective phase then? Well, Wall Street has not come under a wave of selling pressure as yet, however the appearance of a bearish key one day reversal is a concern for the bulls. This single day trading signal which saw a move to a new all-time high at 1968 rejected can often be a powerful signal. Bearish reversals have a knack of working on the S&P and therefore should not be ignored. The fact that the DAX also has a bearish key one day reversal at its recent all-time high should also act as a warning signal for the bulls. Equity markets have been a bit aimless since the end of the last earnings season and this week marks a new quarter and a raft of key market moving data for investors to get their teeth into. Watch out, because if the data disappoints, the profit-takers are waiting to move in.

WATCH FOR: Sentiment will be data driven this week. European indices could be helped by any indication that there will be further monetary easing by the ECB. Wall Street has a raft of key US data for its focus, with Manufacturing PMIs, Janet Yellen and then Non-farm Payrolls on successive days. FTSE will continue to play follow my leader but in an underperforming fashion.

Other Assets: Commodities & Bonds

Having seen a couple of weeks of consolidation, government bond yields have started to move lower again as bonds have come back in favour over the past week. This has resulted in sharp moves to the downside on the 10 year yields on the government debt of US, UK, Germany and France. If this were to continue this would not be a great signal for equities which are still trading not far from their all time highs.

The general rule of thumb is that when the US dollar falls, the price of gold will rise. However, with the selling pressure that the dollar has faced in the past week, the lack of appetite to buy gold does not bode especially well. Physical demand has reportedly fallen away with gold moving back above $1300 and this certainly ties in with a plateauing of the recent rally. This could mean that if there is any support for the dollar this week, the gold price could suffer.

WATCH FOR: Oil traders will continue to watch events in Iraq (militants capturing oil terminals) and Libya (reopening of the port in Hariga). Gold movements could be set to move on US economic data which will drive the dollar.