Dollar Lower after Durables, Sterling Highs as Prime Minister May Struck a Deal With DUP

Dollar trades broadly lower today after weaker than expected economic data. Hawkish comments from Fed officials provide little support to the greenback. On the other hand, Canadian Dollar jumps as oil prices rebound. Sterling follows and is lifted broadly by political news in UK. Euro is supported by sentiments data which saw German Ifo hits record high. The greenback is only performing better than Japanese Yen and Swiss Franc. Released from US, durable goods orders dropped -1.1% in May versus expectation of -0.6%. Ex-transport orders rose 0.1% versus expectation of 0.4%.

Fed Dudley and Williams sound hawkish

New York Fed President William Dudley emphasized that "monetary policymakers need to take the evolution of financial conditions into consideration." And, "when financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation." San Francisco Fed President John Williams emphasized that gradual tightening is needed to keep the economy healthy. Recent slowdown in inflation was seen by him as due to one-off factors. And he maintained his stance that a total of three hikes this year is still appropriate. His estimate of neutral policy rate is a little below 3.00%, comparing to the current 1.00-1.25%.

UK PM May struck a deal with DUP finally

Sterling is lifted by news that Prime Minister Theresa May has finally struck a deal with Northern Ireland’s Democratic Unionist Party to secure a government majority. Under the agreement, DUP’s 10 lawmakers will back May’s over the Queen’s Speech, national security and Brexit legislation. In return, May pledged extra GBP 1b in investment over the new two years, in addition to the GBP 0.5b committed. May said in a statement that "I welcome this agreement which will enable us to work together in the interest of the whole United Kingdom, give us the certainty we require as we embark on our departure from the European Union, and help us build a stronger and fairer society at home".

German Ifo hits record high

German Ifo business climate rose to 115.1 in June, up from 114.6 and beat expectation of 114.5. That’s also the highest level on record since 1991 and the fifth straight monthly increase. Expectations rose to 106.8 versus consensus of 106.4. Current assessment also improved to 124.1 versus expectation of 123.2. Ifo President Clemens Fuest said in the release that "sentiment among German businesses is jubilant," and the economy is "performing very strongly." He added that "companies were significantly more satisfied with their current business situation this month" and they also expect business to improve. Looking closer to the detail, "demand and order books have both progressed very well. Production plans remain focused on expansion."

BoJ opinions: Crucial to maintain stimulus

According to summary of opinions of June BoJ meeting, policy members believed there is need to clear up communications to cool talk of stimulus exit. One member noted that "the price stability target cannot be achieved easily within a short time-frame." And, "it is crucial to maintain accommodative financial conditions and keep the economy expanding as long as possible". Another member noted that "it’s necessary to continue with the current easy policy persistently and wait for a steady increase in demand and further falls in unemployment rate to lead to higher wages, prices and inflation expectations". Another member also said that "the timing of an exit cannot be foreseen as achievement of the price target is still considerably distant".

BIS urges policy makers to accelerate the "great unwinding"

The Bank of International Settlement said that even though there are still risks to the global economy due to high debt levels and low productivity growth, policy makers have to accelerate the "great unwinding" of quantitative easing program and low interest rates. The bank’s head of research Hyun Song Shin said that "if we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization."

Meanwhile, BIS also named some risks for the global economy. It warned that "attention shifted away from monetary policy, and political events took center stage." Other than that, "a significant rise in inflation could choke the expansion by forcing central banks to tighten policy more than expected. Bedsides, "a withdrawal into trade protectionism could spark financial strains and make higher inflation more likely. Also, "policy normalization presents unprecedented challenges, given the current high debt levels and unusual uncertainty". Finally, "banks’ continued reliance on short-term U.S. dollar funding remains a pressure point," and "questions remain about the resilience of funding under more stressed conditions."

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 111.12; (P) 111.28; (R1) 111.40; More…

USD/JPY fails to take out 111.78 temporary top and stays in range. Intraday bias remains neutral for the moment. Further rise is favor with 110.63 minor support intact. Above 111.78 will target channel resistance (now at 112.82). Sustained break there will suggest that whole pull back from 118.65 has completed at 108.12 already. In such case, further rise should be seen to 114.36 resistance for confirmation. However, break of 110.63 will turn bias back to the downside for 108.81 instead.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It’s uncertain whether it’s completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Economic Indicators Update