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Boris and Kathy Forex Weekly 27/2/2017

Posted on: 27 February 2017 , by: Boris & Kathy , category: Market Review

While there was very little consistency in the performance of the U.S. dollar this past week the greenback for the most part struggled to rally. It sank sharply versus the Japanese yen and only performed better than the euro.

Spot Returns Month to Date 24/2/17

US DOLLAR

Data Review

  • Manufacturing PMI 54.3 vs. 55.2 Expected
  • Services PMI 53.9 vs. 55.8 Expected
  • Composite PMI 54.3 vs. 55.8 Prior
  • Existing Home Sales 3.3% vs. 1.1% Expected
  • FOMC Minutes signal rate hike coming soon
  • New Home Sales 3.7% vs. 6.4% Expected
  • U. of Mich. Confidence 96.0 vs. 96.3 Expected
  • U. of Mich. Current Conditions 111.5 vs. 111.2 Prior
  • U. of Mich. Expectations 86.5 vs. 85.7 Prior

Data Preview

  • Durable Goods Orders and Pending Home Sales- Durable goods and pending home sales is difficult to predict but can be market moving
  • GDP Revision- Revisions to GDP is difficult to predict but changes are market moving
  • Chicago PMI- Sharp rise in Empire and Philly Fed survey point to stronger Chicago PMI
  • Personal Income and Spending - Weaker wages offset by slightly stronger retail sales
  • ISM Manufacturing - Will have to see how  Chicago PMI but looking good with Empire and Philly Fed survey increased strongly
  • Beige Book Release – Beige Book likely to contain an optimistic tone
  • ISM Non-Manufacturing Composite, Services and Composite PMI- Will have to see how  ISM manufacturing but likely to be positive

Key Levels - USD/JPY

  • Support 111.50
  • Resistance 114.00

For the past two weeks investors have been scratching their heads over the underperformance of the U.S. dollar. Data has been good, the U.S. economy is improving and practically every Federal Reserve official who had an opportunity to speak said rate hikes are coming. So why has the U.S. dollar struggled to rally, particularly against the Japanese yen? The answer lies in expectations – the media has been talking up the possibility of a March rate hike and investors are just not convinced that it will happen so quickly. The Federal Reserve telegraphed plans to raise interest rates 3 times this year and many believe that these moves will be made at the quarterly meetings coinciding with Yellen’s press conference. The media has circled around these dates (the next one is in March) and rightfully so as the presser gives Yellen the opportunity to explain the central bank’s decision.

However Fed Fund futures show the market only pricing in a 36% chance of a Fed hike next month and a 63% chance of a move in May so there’s a misalignment between what the data is showing, what the Fed has been saying and what the market believes. We think the dollar should be trading higher but there’s no question that investors need more convincing. This could come in the form of an aggressive tax cut plan from Trump that provides the fiscal stimulus that everyone is waiting for, a hot non-farm payrolls report and/or clearer guidance from the Fed leadership.

While non-farm payrolls won’t be released this week, President Trump delivers a speech before a joint session of Congress on Tuesday where he is expected to unveil has “phenomenal tax cut plan,” which will be followed by speeches from Yellen and Fischer on Friday. In between we’ll hear from more U.S. policymakers, get a glimpse of the Beige Book and see how the U.S. economy has been performing. Manufacturing and non-manufacturing ISM reports are scheduled for release along with consumer confidence, personal income and personal spending. While these economic reports are important, Trump’s speech and policy plans will dictate how USD/JPY trades in the coming week. The currency came under heavy selling pressure in previous days and looks vulnerable to a deeper correction.


BRITISH POUND

Data Review

  • CBI Trends Total Orders 8 vs. 4 Expected
  • CBI Trends Selling Prices 32 vs. 28 Prior
  • Public Finances -26.5b vs. 36.3b Prior
  • Central Government NCR -27.8b vs. 19.3 Prior
  • Public Sector Net Borrowing -9.8b vs. -14.5b Expected
  • GDP (QoQ) 0.7% vs. 0.6% Expected
  • GDP (YoY) 2.05 vs. 2.2% Expected

Data Preview

  • Manufacturing PMI – Potential for upside surprise given sharp rise in CBI index
  • Services and Composite PMI- Will have to see how PMI manufacturing and GfK confidence numbers fare

Key Levels - GBP/USD

  • Support 1.2400
  • Resistance 1.2600

Sterling finally broke out after consolidating against the U.S. dollar for most of the month but instead of extending higher, it dropped back into its prior range at the end of the week. The move was more technical than fundamental as GBP/USD broke quickly after clearing out stops at 1.2500. The “big news” from the U.K. this week was out of Scotland –the Scottish is government openly discussing another Scottish independence referendum and after Brexit, they are convinced they could win. Scotland voted to stay in the EU in last June’s referendum, but as a part of the U.K., its future lies in the hands of Theresa May and they don’t like that. Although a vote wouldn’t be held until 2018, if a second referendum is announced in the next few weeks like some politicians are pressing for, the renewed political uncertainty would be negative for the currency. Looking ahead, the U.K.’s manufacturing, construction and service sector PMI numbers are scheduled for release and a recovery after last month’s muted reports would validate sterling’s recovery.


EURO

Data Review

  • GE PPI 0.7% vs. 0.3% Expected
  • EZ Consumer Confidence -6.2 vs. -4.9 Expected
  • GE Manufacturing PMI 57.0 vs. 56.0 Expected
  • GE Services PMI 54.4 vs. 53.6 Expected
  • GE Composite PMI 56.1 vs. 54.8 Expected
  • EZ Manufacturing PMI 55.5 vs. 55 Expected
  • EZ Services PMI 55.6 vs. 53.7 Expected
  • EZ Composite PMI 56.0 vs. 54.4 Expected
  • GE IFO Business Climate 111.0 vs. 109.6 Expected
  • GE IFO Expectations 104.0 vs.103 Expected
  • GE IFO Current Assessment 118.4 vs. 116.7 Expected
  • EZ CPI (MoM) -0.8% vs. -0.8% Expected
  • EZ CPI Core (YoY) 0.9% vs. 0.9% Expected
  • GE GDP (QoQ) 0.4% vs. 0.4% Expected
  • GE GfK Consumer Confidence 10.0 vs. 10.1 Expected

Data Preview

  • EZ Economic Confidence Report- Potential for downside surprise given lower GE confidence. French political uncertainty could weigh on sentiment
  • EZ CPI- Potential for downside surprise given lower German and FR CPI
  • GE Unemployment Change and Unemployment Claims Rate- Potential for upside surprise given rate of job creation highest since June 2011.
  • GE CPI – Potential for upside surprise given sharp rise in PPI
  • EZ PPI and Unemployment Rate- Potential for downside surprise given lower German and French CPI
  • GE and EZ Services and Composite PMI Revision - PMI revisions are difficult to predict but can be market moving
  • EZ Retail Sales - Will have to see how GE and FR spending data fare

Key Levels - EUR/USD

  • Support 1.0500
  • Resistance 1.0700

The euro ended the week lower against the greenback. Politics will remain front and center for the euro as well as investors watch for fresh French election headlines. Two candidates (Bayou and Jadot) pulled out this past week and more could follow. Any decrease in the chance of Marine Le Pen becoming the next French President would be viewed as negative for the currency. Recent polls show Le Pen in the lead even in a race with scandal laden Filion not far behind. Le Pen’s popularity rose after riots over an alleged police rape spread across the suburbs of France. Her anti-government / terrorism / immigration / EU views are gaining traction but major news agencies are describing a victory by this far-right candidate as the next major political earthquake. It would usher a new wave of protectionism in the Eurozone’s second largest economy that could threaten the very fabric of the Eurozone community. The Eurozone economy on the other hand has been performing better with inflation on the rise, manufacturing and service sector activity picking up steam, leading to an improvement in German business confidence. With only German unemployment, retail sales and Eurozone consumer price reports scheduled for release, the euro will most likely take its cue from U.S. and/or European political headlines.


AUD, NZD, CAD

Data Review

Australia

  • RBA minutes show spare capacity in labor market and drop in quarterly GDP contribute to decision to keep rates steady

New Zealand

  • PMI Services 59.5 vs. 58.4 Prior
  • PPI Input (4Q) 1.0% vs. 1.5% Prior
  • PPI Output (4Q) 1.5% vs. 1.0% Prior
  • GDT Prices -3.2%

Canada

  • Wholesale Sales 0.7% vs. 0.4% Expected
  • Retail Sales (MoM) -0.5% vs. 0.0% Expected
  • CPI (MoM) 0.9% vs. 0.4% Expected

Data Preview

Australia

  • Manufacturing PMI and GDP – Potential for upside surprise given very strong trade but slightly weaker retail sales
  • CH Non-manufacturing and manufacturing PMI- Chinese data is difficult to predict but will be market moving
  • Trade Balance and Building Approvals- Will have to see how PMI manufacturing
  • Services PMI - Will have to see how PMI manufacturing

New Zealand

  • Trade Balance – Potential for downside surprise given big drop in manufacturing PMI and lower dairy prices
  • Terms of Trade Index- Potential for downside surprise given strong NZD, weaker dairy hurts trade

Canada

  • Current Account Balance- Potential for downside surprise given significant weakness in trade
  • BOC Rate Decision – No major changes expected to policy
  • GDP- Lower retail sales and trade in Dec. Q data likely to be softer as well on trade

Key Levels

  • Support AUD .7600 CAD 1.3000 NZD .7100
  • Resistance AUD .7700 CAD 1.3200 NZD .7300

All three of the commodity currencies held well last week versus the greenback with the oversold New Zealand dollar leading the gains. Data from New Zealand was mixed – although service sector activity gained momentum, producer prices and consumer spending grew at a slower pace while dairy prices fell. Nonetheless, the currency, which has come under heavy selling in recent weeks, rebounded strongly on the back of U.S. dollar weakness.  The Canadian and Australian dollars will be in focus this coming week with a Bank of Canada monetary policy announcement and Australia’s fourth quarter GDP report on the calendar.

Although retail sales weakened as shown in the table below, consumer prices rose strongly and there’s enough improvement in oil, housing, employment, and trade for the central bank to leave policy unchanged. With that in mind, if the BoC is more cautious, it could cement a bottom in USD/CAD. Aside from the monetary policy announcement the country’s fourth quarter report is also scheduled for release. The Australian dollar on the other hand should continue to be supported by healthier data with the country’s manufacturing and fourth quarter GDP numbers likely to show underlying strength in Australia’s economy.

Canada Economy - Central Bank Meeting


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