Euro Extends Rally as Data Affirms Optimism, Pound Unmoved by CPI

Euro surges broadly today as incoming economic data is in line with a brighter outlook. Some attributes that rally in Euro to the weakness of Dollar. The greenback is pressured as the markets are getting more doubtful on US President Donald Trump’s implementation of economic policy. For the very least, he is constantly being distracted by other issues, like currently, his firing of former FBI director James Comey and subsequent sharing of sensitive information with Russia. But it should be noted that both DAX and FTSE 100 hits record highs today. The moves in the markets are clearly driven by optimism. Released in US, housing starts dropped to 1.17m annualized rate in April while building permits dropped to 1.23m.

German ZEW jumps to near two year high

German ZEW economic sentiment rose to 20.6 in May, up from 19.5 but missed expectation of 22.0. Current situation gauge rose to 83.9, up from 80.1 and beat expectation of 82.0. The reading is, nonetheless, highest since July 2015. Eurozone ZEW economic sentiment jumped sharply to 35.1, up from 26.3, beat expectation of 29.1. ZEW President Achim Wambach noted that "the latest figures on gross domestic product confirm that the German economy is in good shape." And, "the prospects for the euro zone as a whole are gradually improving, further strengthening the economic environment for German exports." Also from Eurozone, GDP rose 0.5% qoq in Q1, in line with preliminary reading, same as prior quarter’s growth. Eurozone trade surplus widened to EUR 23.1b in March, up from EUR 18.8b. Italy GDP rose 0.2% qoq in Q1.

Pound unmoved by strong inflation reading

UK CPI accelerated to 2.7% yoy in April, up from March’s 2.3% yoy and beat expectation of 2.6% yoy. Core CPI rose to 2.4% yoy, up from 1.8% yoy and beat expectation of 2.3% yoy. RPI accelerated to 3.5% yoy, up from 3.1%, beat expectation of 3.4%. PPI input slowed to 16.6% yoy, PPI output was unchanged at 3.6% yoy, PPI output core rose to 2.8% yoy. Sterling received little boost from the set of stronger than expected inflation data. It’s argued that the pop in the CPI readings is expected and could instead drag down price growth in the coming months. On the other hand, FTSE surges to new record high today and stays firm around 7500 handle after the release.

BoJ Kuroda: Quite sure of enough tools for stimulus exit

BoJ Governor Haruhiko Kuroda said today that there "may be some challenging issues" regarding stimulus exit. But he is "quite sure" that the central bank has "enough tools" to manage it. Meanwhile, Kuroda also noted there will be lessons to be learned from Fed’s normalization of policies. But he also emphasized that "the United States is the United States, Japan is Japan. At this stage, we’re not exiting." There has been much concern over the size of BoJ’s balance, in particular that it already took out 40% of JGBs in the markets. But Kuroda talked it down and said there are still 60% left and there won’t be "any constraint" to the so called Yield Curve Control. Release from Japan, Tertiary industry index dropped -0.2% mom in March.

RBA Minutes: Reiterated concerns on housing and labor

The RBA minutes for the May meeting contained little news but reiterated policymakers’ the importance of the property market and the labor market conditions in its policy decision. The stance to leave the monetary policy unchanged was obviously due to the perceived uncertain outlook in these two areas. As noted in the concluding statement in the minutes, ‘the board continued to judge that developments in the labour and housing markets warranted careful monitoring’. More in RBA Reaffirmed Importance Of Housing And Labor Markets On Decision-Making, Defends The Trend Of Rising Part-Time Workers.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0934; (P) 1.0962 (R1) 1.1001; More….

EUR/USD’s rally accelerates further today and reaches as high as 1.1073 so far. 100% projection of 1.0339 to 1.0828 from 1.0569 at 1.1058 is already met and there is no sign of topping. Intraday bias remains on the upside for 138.2% projection at 1.1245, which is close to 1.1298 key resistance. For now, rise from 1.0339 is still viewed as a corrective move. Hence we’d expect strong resistance below 1.1245/98 to limit upside and bring reversal. On the downside, below 1.0989 minor support will turn bias neutral and bring consolidation. But break of 1.0838 support is needed to indicate short term topping. Otherwise, further rise will remain in favor.

In the bigger picture, as long as 1.1298 key resistance holds, whole down trend from 1.6039 (2008 high) is still expected to continue. Break of 1.0339 low will send EUR/USD through parity to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. However, considering bullish convergence condition in weekly MACD, break of 1.1298 will indicate long term reversal.

Economic Indicators Update