Euro Shrugs off CPI Miss, Resuming Recent Rise against Dollar and Pound

Euro shrugs off lower than expected Eurozone inflation reading and strengthens against Dollar and Sterling today. EUR/USD is heading back to 1.1267 resistance while USD/CHF is heading back to 0.9691 support. Both currency could be set to resume recent rally against the greenback. Eurozone CPI slowed to 1.4% yoy in May, down from 1.9% yoy and missed expectation of 1.5% yoy. Eurozone core CPI slowed to 0.9% yoy, down from 1.2% yoy and missed expectation of 1.0% yoy. Also from Eurozone, Germany unemployment dropped -9k in May, fewer than expectation of -14k. Unemployment rate dropped to 5.7%. German retail sales dropped -0.2% mom in April.

The Euro remains supported by expectation that ECB policymakers would start discussing stimulus exit in the June meeting. There might be a hawkish twist and President Mario Draghi’s press conference. But even if not, ECB should be starting to pave the way to announce something in September. The current asset purchase program will end in December and ECB should prepare the markets for what’s after that in by latest September.

Italian Central Bank Governor Visco: Leaving euro won’t solve Italy’s problems

In Italy, central bank governor Ignazio Visco said that "it is an illusion to think that Italy’s economic problems could be solved more readily outside Economic and Monetary Union." And he emphasize that leaving the Euro would not heal the "structural defects" of Italian economy, not "lower interest expenses and not "magically lower our debt level". He warned that "on the contrary, it would generate serious risks of instability". Instead, he urged Italy to work on brining down its huge public debt, which is at around 132% of GDP and the second highest in Eurozone after Greece. Visco emphasized that "an appreciable and lasting decline in the debt-to-GDP ratio must commence without delay."

Some volatility is seen in Euro this week on news that Italy could be close to an early election. With major parties converging to a deal on a new electoral law, an early election might take place in coming months, probably synchronizing that of German’s in September. The euro reacted negatively and declined to the lowest level in more than a week before rebound. The 10-year Italian-German yield spread soared to almost the highest level in a month on concerns that the rapidly-rising Five Star Movement, the populist, euro-skeptic political party, could eventually become part of the coalition in Italy and destabilize European Union again. More in Political Uncertainty Re-Emerges in Europe, Euro Volatility Spikes.

Sterling weighed down by prospect of hung government

Sterling is so far the weakest major currency today, next to Aussie. The British Pound is pressured as a new poll indicates that Prime Minister Theresa May’s Conservative could fall short of an overall majority in the upcoming election on June 8. According to a new modelling by YouGov for the Times, it predicts that the Conservative would get 310 seat in the parliament, down from the prior 330 seat. On the other hand, Labour would get 257 seats, up from prior 229 seat. As the required majority is 326 seats, it now means that a hung parliament is a realistic possibility.

Released from UK, mortgage approvals dropped to 65k in April. M4 money supply rose 1.2% mom in April. Gfk consumer confidence rose to -5 in May, BRC shop price dropped -0.4% yoy. Also from Europe, Swiss UBS consumption indicator rose to 1.48 in April.

Canada GDP beats expectation, but impact offset by oil weakness

Canada GDP rose 0.5% mom in March, up from prior month’s 0.0% mom and beat expectation of 0.3% mom. In annualized term, GDP growth accelerated to 3.7% qoq in Q1, up from prior quarter’s 2.7% but missed expectation of 3.9%. USD/CAD stays in tight range above 1.3387 today as consolidations continue. The positive effect from GDP data was offset by falling oil price. WTI crude oil is trading down -2.5% at 48.4 at the time of writing and looks set to take on 48 handle soon. Meanwhile, Dollar will look into Chicago PMI, pending home sales and Fed’s Beige Book report later today.

China PMIs show stabilizing in the slowdown

In China, the National Bureau of Statistics PMI manufacturing, the official one, was unchanged at 51.2 in May. While that stayed at the lowest level in six months, it was above expectation of 51.0. Looking at the details, new orders was unchanged at 52.3, export orders rose 0.1 to 50.7. Production dropped to 53.4, down from 53.8. Employment rose to 49.4 from 49.2. Input price dropped to 49.5 from 51.8. Output prices dropped to 47.6 from 48.7. The official PMI services rose to 54.5, up from 54.0. Overall, the set of data at least showed no further deterioration in growth momentum. Nonetheless, the picture will still be closely monitored by economists in the coming months. The impact from Moody’s downgrade of China’s credit ratings for the first time in nearly 30 years is yet to be seen. Elsewhere, Japan industrial production rose 4.0% mom in April. Housing starts rose 1.9% yoy in April.

New Zealand businesses upbeat

New Zealand ANZ business confidence rose to 14.9 in May, up from 11.0. ANZ noted that "the economy’s excellent adventure continues". And, "firms are upbeat, and prepared to hire and invest. That’s an economic expansion that is still going full steam. Survey indicators are elevated but not stratospheric, consistent with the economy evolving into a mature stage of the expansion; we’re growing nicely off a good base, as opposed to lifting rapidly off a low level."

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9718; (P) 0.9763; (R1) 0.9789; More…..

USD/CHF drops sharply today but it’s staying above 0.9691 temporary low. Intraday bias stays neutral first. Consolidation from 0.9691 could have completed at 0.9807 already. Break of 0.9691 will resume recent fall from 1.0342 to 100% projection of 1.0342 to 0.9860 from 1.0099 at 0.9617. We’ll start to look for reversal signal below there. In case of another rise as the consolidation extends, upside should be limited by 0.9858 support turned resistance and bring fall resumption.

In the bigger picture, USD/CHF is bounded in medium term range of 0.9443/1.0342 for the moment. Consolidative trading would likely continue and medium term outlook remains neutral. Break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. Meanwhile, downside attempts should be contained by 0.9443 key support level.

Economic Indicators Update