US data on deck

The lack of a real driver has created choppy directionless trading. Yet for today, traders' attentions will focus back on the US data for support of the Fed policy path. After yesterday’s fall in the Empire State manufacturing headline index, expectations for evidence of economic strengthening will be needed. Much of the optimism around the US economy was driven by sentiment surveys, which in recent reads have declined from the elevated reading that came post-US election. That said, data coming from the US housing sector remains solid as the NAHB housing index rose to 70 in May from 68 in April. Today’s Industrial Production should moderate from March's 0.5% rise to 0.4%.

Yet given the volatility in the indicator plus recent deceleration in sentiment, there is room for a downside disappointment. Housing starts with homebuilding activity strong and after a weak read in March, markets expect a recovery of 3.7% m/m.

There is also healthy consumer demand and solid labour markets (which is finally seeing wage gains) and while building permits should weaken slightly after a strong March down 0.2% from 3.6%, there is room yet for a quickening pace as the weather has been unseasonably warm. Weaker US data and domestic political confusion has dimmed expectations both for a faster Fed hiking cycle and faith in the USD (DXY fallen to 98.78 from 99.88).

However, the resilience of US short end yields suggest longer-term support for the USD. We caution investors from becoming too bearish on the USD ahead of 14th June Fed rate decision. The stability in US rates is the primary reason the USDJPY has not corrected further of the 114.38 resistance barrier.