Dollar Stays Firm on Tax Cut Hope, Euro Supported by Solid PMIs

Dollar and Euro are both trading firm today. The greenback is supported by hope of passing Republican’s tax plan by the end of the year. US President Donald Trump will visit Senate Republicans for lunch today for talks on tax cut. Meanwhile, Solid PMI data fro Eurozone supports that case for ECB to announce tapering later this week. New Zealand Dollar trades broadly lower as markets react negatively to the labor led coalition’s policies. Yen and Aussie follows closely and as the second and third weakest.

Eurozone PMIs solid, support ECB tapering

Eurozone PMI manufacturing rose to 58.4 in October, up from 58.1, beat expectation of 57.8. Eurozone PMI services, however, dropped to 54.9, down from 55.8, below expectation of 55.6. Germany PMI manufacturing dropped to 60.5, down from 60.6, but beat expectation of 60.0. Germany PMI services dropped to 55.2, down from 55.6, below expectation of 55.5. France PMI manufacturing rose to 56.7, up from 56.1, beat expectation of 56.0. France PMI services rose to 57.4, up from 57.0, beat expectation of 56.9.

Markit noted that "firms don’t appear to have been unduly affected by recent euro strength, with growth of new export orders accelerating in October." And, "healthy demand in export markets appears to be outweighing any negative currency impacts." The solid set of PMI data shouldn’t alter ECB’s plan to announce tapering of asset purchases later in the week.

BoE Deputy Cunliffe: Economy has "clearly slowed"

BoE Deputy Governor Jon Cunliffe warned that the economy has "clearly slowed" this year. That’s due to "the squeeze we have seen on real incomes and imported inflation from the depreciation [sterling] that has come in. And pay has remained relatively subdued." He pointed out that interest rates "will not need to go up by as far and as fast as they did before the crisis". Still, "over the forecast period of three years rates will need to rise". However, he emphasized that the exact timing of rate hike is "a more open question".

Japan PMI manufacturing dropped

In Japan, Nikkei continues to push higher today, riding on Prime Minister Shinzo Abe’s landslide victory in Sunday’s snap election. At the time of writing, Nikkei is trading up 57pts, or 0.25%. Japan PMI manufacturing dropped to 52.5 in October, down from 52.9, and missed expectation of 53.1. Nonetheless, that’s still the 14th straight months of expansionary reading. Markit noted that "although still improving solidly, the Japanese manufacturing sector appeared to lose some momentum in October, as growth eased from September’s four-month high." And, "softer expansions were seen for both output and new orders." The output component dropped to 52.6, down from 53.2. New orders dropped to 52.4, down from 53.4. Expectation on output also dropped to 57.5, down from 61.2.

BoJ to lower inflation forecasts again

Bloomberg reports today, quoting unnamed source, that BoJ is considering to lower its inflation projection again in the quarterly report to be released next week. From latest forecast, BoJ estimate core CPI to rise 1.1% for the fiscal year ending in March 2018. Downgrading the inflation forecast will reinforce the view that BoJ would continue with the ultra-loose monetary policy. That will also come just after Prime Minister Shinzo Abe got fresh mandate for his Abenomics.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 113.08; (P) 113.59; (R1) 113.93; More…

Intraday bias in USD/JPY remains neutral for the moment. Some more consolidation could be seen below 114.09 temporary top. But in any case, will remain mildly bullish as long as 111.64 support holds. Above 114.09 will target 114.49 resistance next. Decisive break there will confirm that correction pattern from 118.65 has completed at 107.31 already. And USD/JPY should then target a test on 118.65.

In the bigger picture, medium term rise from 98.97 (2016 low) is not completed yet. It should resume after corrective fall from 118.65 completed. Break of 114.49 resistance will likely resume the rise to 61.8% projection of 98.97 to 118.65 from 107.31 at 119.47 first. Firm break there will pave the way to 100% projection at 126.99. This will be the key level to decide whether long term up trend is resuming.

Economic Indicators Update