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At 8:30:00 AM US Weekly Jobless Claims (exp n/f, prev 383k) US May PPI M/M (exp 0.2%, prev -0.2%) US May PPI M/M (exp 0.2%, prev -0.2%) US May PPI Ex- food/energy M/M (exp 0.1%, prev 0.1%) US May PPI Y/Y (exp n/f, prev -2.0%) US May PPI Ex-food/energy Y/Y (exp n/f, prev 0.4%) US May Retail Sales (exp 0.1%, prev 1.2%) US May Retail Sales Ex-autos (exp 0.2%, prev 1.0%)
The dollar added to overnight gains against the euro, pressuring it below 94 cents and tried to break the 126-yen mark in London trade before cooling off ahead of key US economic data at 8:30 AM. The dollar rebounded yesterday along with a late session bounce in stocks and that correlative trend is expected to continue. Therefore, most dealers are sidelined ahead of the data and how the stock market reacts when it opens after the figures.
Data from the US today includes May PPI and initial jobless claims, but the key report will be the US retail sales report. It is expected to show the first decline since January and could take back yesterday's late session rally on Wall Street. May retail sales are expected to fall 0.5%, reversing April's strong 1.2% increase and will be mostly led by a decline in auto sales, which will counter an expected 0.3% increase in sales excluding auto sales. Despite the positive aspect in sales excluding autos, the reaction is likely to be negative and given the bearishness on the dollar, a further selloff in US assets would only increase the downward pressure.
EUR/USD dipped below 94 cents in London trade but dealers appeared unwilling to take it much lower ahead of important US data later in the day. The euro will need to regain and maintain above trendline support at 94.40/45 today to convince bulls that the rally has not run out of steam. If not, EUR/USD risks breaking below the 94.00/93.90 area for a bigger correction past 93.35 onto 92.80 and possibly the 92-cent handle. Follow up resistance is seen at 94.60, the 62% retracement of the 95.05 to 93.95 decline, 93.75 and 95.05. Failure to at least test 94.60 would show signs that the euro's rally is losing momentum. However, a break above 93.60/75 area would put the 95.05 high back in the euro's sight.
In the ECB's Monthly Bulletin for June forecasts for E12 inflation were at 2.1%-2.5% in 2002, and 1.3%-2.5% 2003. The bank said it would remain vigilant on the inflation outlook as oil remains a risk in the short run. However, it did not comment on the effect of the rising euro, saying it was too early to asses the impact of the euro on the inflation outlook, but recent wage deals are a concern. Finally the ECB saw GDP at 0.9%-1.5% in 2002, and 2.1%-3.1% in 2003.
Separately, the IMF today revised down Eurozone growth to 1.3% from 1.4% in '02 and held its '03 forecast unchanged at 2.9%. In contrast, they revised up the US outlook to 2.7% from 2.3% in '02 and to 3.5% from 3.4% in '03. The IMF sees '02 global growth at 2.9%, up from its previous forecast of 2.8% and 4.1% in '03 up from 4.0%.
Also helping the dollar today was Gold falling in the London fix to $317, a 3-week low. Easing tension in Pakistan/India have removed much of the war premium attached to the safe haven commodity.
USD/CHF also benefited from a lack of safe haven demand and broke above trendline resistance at 1.5660 and rose to a 7-day high of 1.5710. Support is seen at 1.5660 and 1.5630 backed by 1.5600, the 62% retracement of this week's rally. A break below here would test Wednesday's low of 1.5535 and below that would test the 2-1/2 year low of 1.5490 set last Friday. However, if USD/CHF can hold above 1.5660 trendline resistance mark it opens the way for a test of 1.5700 followed by 1.5745 and 1.58.
GBP/USD regained the 1.47 level after an overnight retreat to 1.4680, but resistance at 1.4715/20 (50% of 1.4755 to 1.4680) is seen containing the upside for now. Sterling will have to break above 1.4725 (62% of same move) to put the latest 8-month high of 1.4755 back under pressure. Failure to do so could initiate a decline under support at1.4680 with subsequent foundation holding at 1.4625-30--just near the 61.8% retracement of the rise from this week's low of 1.4550 to the 1.4755 high.
Sterling showed little reaction to the Bank of England's George who said in the latest inflation report that the central bank would have "no option" but to raise interest rates if domestic demand growth did not slow. Specifically, George said consumer demand needs to fall by 50% in the coming years. Moreover, house price inflation is running at 18% y/y, which is unsustainable as well. Therefore, with no signs of such abatement in demand, economists see the MPC raising rates as early as next month. BoE members also expressed concern over the lack of growth in Q1 despite a booming domestic economy, and see a possible upward revision to the number. They expect growth in Q2 to be around 1%.
The BoJ again upgraded its assessment of the economy this month, making it the fourth consecutive upward reassessment as exports continue to provide a strength to the struggling economy. The central bank also said that consumption and the job market were showing some bright signs as well but that a drop in overseas demand would weigh on the recovery. The MoF reported that Japan's unadjusted April current account surplus rose 21.7% y/y to 1.085 trillion yen, and the trade surplus gained 18.9% y/y to 1.004 trillion yen.
But USD/JPY benefited from weakness in the Nikkei again today and given the Bank of Japan's successful succession of interventions, the upside in USD/JPY remains favored The pair is now up 2% from the last intervention of June 4 and tested the 126 level today for the first time in 6 weeks. USD/JPY fizzled out at 125.91 as it encountered option barriers ahead of 126. Strong support is seen in the 125.45/50 area which marks both the 50% retracement of the 115.75-135.15 move and the 62% of 125.20 to 125.91 rally. Subsequent support is seen at 125.20 backed by 124.75.
Japan's economic council report says the economy is on track to recover but that risks remain and the council is hopeful of effective policy to tackle deflation. Says FY03/04 new JGB issuance will be kept near 30 trln yen and FinMin Shiokawa says no additional fiscal stimulus steps are planned. Meanwhile, tax reform is being debated in parliament.