Friday’s session had no top tier data releases scheduled and currencies were mostly flat ahead of the US open.
EURUSD was –0.1% at 1.085 and EURGBP unchanged from Thursday’s close at 0.8577.
The weekly performance table for G7 currencies saw the New Zealand Dollar leading with a gain of 1.54% against the USD and sterling in second place with a gain of 1.05%.
The story of the week has been the softer USD, but the decline may now have ended as Thursday’s session found support at the 200-day moving average as Unemployment Claims showed no further signs of a deteriorating labour market.
US Dollar Drops to Support
The DXY represents the US dollar versus a basket of currencies, with a heavy weighting against the euro. This made a sharp drop on Wednesday as US CPI came in slightly weaker than expected and continued to fall on Thursday. However, it later reversed as it found support near the April lows and the 200dma. This may halt the decline which has seen the dollar steadily fall throughout May. It is the second weakest currency this month, and only outperforming the Yen.
While some weakness may be merited due to the Fed’s resolutely dovish stance and the softening of recent data, the situation does not seem to call for a significant decline. The US economy is still markedly stronger than other areas and the Fed is not likely to cut before September. With a June cut from the ECB almost certain, and an August cut from the BoE very likely, both EURUSD and GBPUSD may have limited upside. As ING note,
“…there is not enough thrust from US data to justify a significantly weaker greenback just yet. Aside from the inflation aspect – and markets may have reacted a bit too optimistically to the CPI and PPI – jobless claims also eased back yesterday to 222k after a jump to 232k one week ago.”
Claims would need to break above 250K consistently to warn of a truly weak economy and perhaps an earlier cut by the Fed.
Pound Sterling Ready for a Big Move
Sterling has been holding steady for most of the week as the employment report failed to ignite any volatility. Markets are now completely focused on the next CPI release which is due next week and could decide whether the BoE make an early rate cut in June or hold steady until August. Services inflation will be key, and while the headline number could drop, the bank may not feel comfortable cutting early without progress on this metric.
That said, a cool CPI reading will encourage dovish bets and could weigh on the pound. ING “currently sees risks skewed to the dovish side for the Bank of England, and we continue to like the chances of a move higher in EUR/GBP as markets may increase their bets on a June rate cut.”
0.85 has been very strong support for EURGBP and it does seem that there is little chance of this level breaking without a surprise catalyst. The path of least resistance is therefore likely higher and EURGBP has settled near 0.86. Any dovish shift from the BoE or progress on inflation could see the pair rise towards 0.87 which is likely to act as a strong resistance.
GBPUSD may also be vulnerable to weakness, partly due to the potential negative catalysts for the pound, but also because the dollar has reached support and should rebound in the coming weeks.
