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Weekly Fx Strategy

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Low Inflation, Slowing PCE May Trigger Fresh Dollar Selling

Mon, Apr 30 2007, 14:06 GMT
by Ashraf Laidi

CMC Markets

Due at 8.30 am is the March core PCE price index expected to have slowed to 0.1% from 0.3% m/m, while the y/y rate is expected to slow to 2.1% from 2.4%, thus, making a significant move towards the Fed’s preferred rate of 2.0%.  

Also due at 8:30 am EST is the report on March personal spending and personal income , with the former expected up 0.5% from 0.6% and the latter seen up 0.5% from 0.6%. 

A slowdown in personal spending along with slowing core PCE price index would imply that not only the US consumer is backtracking, but the Fed’s inflation argument is weakening, paving the way for interest rate cuts as early as June at a time when US growth is at its lowest in 4 years. 

Due at 10 am EST is the Chicago PMI index expected to have dropped to 54 in April after having jumped to 61.7 in April. Considering that the index fell below 50 in January and February, we expect the April figure to come in below expectations at 51.  

Also at 10 am EST, are March construction spending expected up 0.2% from 0.3% in February.

Euro seen regaining 1.3650s on US growth concerns despite Turkey risk

Our expectations for weaker personal spending and slowing core PCE price index are to boost the euro higher against the dollar, targeting $1.3650 from the current $1.3610. The single currency has come off Friday’s all time high of $1.3682 after the Turkish Army threatened the ruling government with a Coup if the new Prime Minister did not distance itself from his “religious roots”. Unlike in 2000 when the Turkish Lira crisis was triggered by economic concerns, the current crisis is largely a result of political concerns, while economic fundamentals are at their healthiest in over a decade.

Preliminary target stands at 1.3650, followed by 1.3680 and 1.3720. Any downside on strong US data is seen dragging the pair towards 1.3580 and 1.3560. Concerns of weak US payrolls this Friday should help buyers step in and stabilize the pair. Payrolls are expected to growth by 90K following 180K with the unemployment rate seen up at 4.5% from 4.4%.

Yen seen rebounding to 119

USDJPY fell to as low as 119.18 in early Asian trade before rebounding to 119.73 after Japan’s finance minister played down Friday’s Q1 GDP figures from the US. The initial yen strength took place after China announced another 0.5% hike in banking reserve requirement to 11.0%. We expect the pair to remain capped at 119.70-75 before turning lower on our expectations for US data weakness. Our preliminary support stands at 119. 30, followed by 119.15 and 118.80. 

Sterling seen boosted on back of US data

Despite our lack of general optimism for sterling, we expect the currency to flex its muscles at the expense of deteriorating US fundamentals. Further US data weakness this morning is expected to boost cable towards $1.9970, followed by 1.9995. Support stands at 1.9920, backed by 1.9880.

Published on  Mon, Apr 30 2007, 14:07 GMT