At 11:00:00 AM US May Kansas City Fed Manufacturing Survey (exp n/f, prev 18) At 2:30:00 PM UK May BRC Retail Sales (exp n/f, prev 2.4%)
The dollar gave back initial gains in London after rising on profit taking in the Tokyo session. Poor retail sales data from Germany had little effect on the euro, which rebounded above 94.50 after twice testing support at 93.93, the 62% retracement of last week's 93.35 to 94.87 rally. The next key technical level is seen at the 95 handle followed by 95.50 and January's 2001 high of 95.95, a break of which would have dealers eyeing parity. Meanwhile, USD/JPY remains well supported above 124 by intervention fears, but unable to break through the 125 level.
With the exception of retail sales and consumer confidence data later in the week, the lack of key economic data will mean dealers remain focused on US equities for direction in the dollar. Last week the Dow dipped below the 9,500 mark. This is psychologically important for the dollar because the last time it broke below 9,500 was the week of September 11. Therefore, a further decline on Wall Street this week would add to investors' fears and the dollar's downward momentum.
EUR/USD rebounded from a session low of 93.93, the 62% retracement of last week's 93.35 to 94.87 rally, and is trading back above previous trendline resistance at 94.25. An earlier break of that level led to some quick profit taking as dealers began to suspect the sustainability of the current rally. But only a break below 93.70 would breach the current trendline support and call into doubt the current rapid pace of the euro's rally. Resistance is seen at the 17-month high of 94.87 followed by 95.00, 95.50 and the January 2001 high of 95.95. After that the next target would be parity with the dollar.
The FX market showed little reaction to news that the EU would give formal approval to US sanctions later in the week over the trans-Atlantic steel row. Duties worth around $300 million could be added to certain US products from key states after the Bush administration added tariffs of up to 30% on steel imports. EUR/USD showed little reaction to the news as it was already anticipated.
France's first round of parliamentary elections on Sunday put the center-right in the lead which could give way to a landslide victory in the second round of voting in June 16 where the right could take around 380 out of 577 seats in France's National Assembly. The possibility of a center-right government in France is a large plus for the euro.
But France's medium term risk remains given that its April budget deficit numbers showed a rise in the imbalance to 32.25 bln euros from 26.09 bln a year ago and French Fin Min Mer caused some controversy after saying the budget deficit would be higher than that estimated by the previous government. France has been amid four Eurozone nations criticized for its fiscal laxity, which is causing no reduction in its deficit/GDP ratio as required under the Eurozone stability pact. The Finance Ministry later clarified Minister Mer's comments on the deficit, asserting that France respected the EU stability pact's 3% deficit/GDP limit.
GBP/USD broke back through the 1.46 figure after falling to a day's low of 1.4555. Sterling also rose to a day's high of 64.52 against the euro after hitting multi month lows last week. But despite the gains, cable continues to trade in the middle of its 3-week range $1.45-1.48 range with resistance at 1.4635-40, followed by 1.4680. Support stands at 1.4575-80, 1.4535-40 and by 1.45.
USD/JPY traded in a tight 50 pip range as dealers are weary of Japan's repeated interventions which have put a rising floor under the dollar. Monetary officials remain concerned about a rising yen hurting the export led recovery. But selling interest remains strong ahead of 125 level keeping the dollar's high limited to 124.91. Moreover, if the dollar continues to trend lower across the board, the MoF will have to accept a lower USD/JPY level, thereby pushing that floor back down. USD/JPY support is seen at 124.60/65 followed by 124.35. Resistance is seen at 125.00.
The market showed no reaction to news that Japan's core machinery orders for April rose 8.4% from down 6.2%, and well above expectations. The annual rate still showed a decline of 17.9% from -22.0% in March, indicating a bottoming out in the economy but not showing any signs of lasting improvement which would lead to a recovery. Moreover, capital spending is not likely to pick up until the US recovery becomes undisputed, meaning real growth wont be seen until much later this year. BoJ officials remain concerned about capital spending as well and said household spending data and the cyclical recovery in exports distorted the impressive 5.7% rise in Jan/March GDP.
The BoJ's Policy Board is expected to keep monetary policy unchanged on Wednesday with the current account target around 10-15 trillion yen. But the yen's 7% rise against the dollar since April is keeping downward pressure on inflation and could put the central bank under more pressure to boost liquidity further. Dealers are also on alert for another intervention from the Bank of Japan this week if the yen begins rising again.