USD higher amid dovish Draghi, focus on this week US data to gauge Fed’s next move
The US dollar rose across the board on Tuesday after a day off for US and UK investors. The Japanese yen was the only G10 currency that was able to keep its head above the water, thanks to solid April’s retail sales data (3.2%y/y versus 2.3% median forecast). The single currency accelerated its debasement amid dovish comment from Mario Draghi before the European Parliament. Yesterday, the president of the ECB made clear that the institution wasn’t ready to unwind its fiscal stimulus amid rising uncertainties on the inflationary outlook. Investors rushed into German bunds and sent yields to multi-week lows dragging the euro lower. The German 5-year yields slid to -0.44%, while the 2-year one fell to -0.72%.
After rallying strongly during the second half of May, EUR/USD came under pressure recently as investors have already discounted monetary tightening in the EU, while slowly pricing in the upcoming rate hike by the Federal Reserve. We anticipate further downside, with the 1.10 (psychological threshold and Fibonacci 38.2% on April-May rally) level as first target.
However, our bullish outlook for the USD remains highly depend on the upcoming US data as the Fed needs a solid ground to lift borrowing costs consistently. The Fed’s favourite measure of inflation, the core personal expenditure, is due for release today and is expected to have eased to 1.5%y/y in April, down from 1.6% in March. Investors will also monitor closely developments in wage growth – will be released on Friday – as it could give a boost to inflation measures. On the other, the unemployment rate and NFP will most likely remain in the background as the recent impressive numbers fail to translate into higher salaries for US people.
Draghi’s comments are sending the euro lower
ECB Governor Mario Draghi remains convinced that the Eurozone needs an extra support stemming from current monetary policy. He mentioned that verbal intervention will stay in the toolbox used by policymakers to fight against European economy lower use of capital resources which represents the main obstacle in order to send inflation back to 2% ECB target. For the time being, the monthly bond purchases will stay at €60 billion.
Data wise, Eurozone inflation has declined to 1.5% from 1.9% in April. Despite the fact it has been a while that this conclusion has been drawn, we can certainly say that massive easing has not boosted inflation yet. Angela Merkel is concerned by the negative aspects of the monetary policy expansion and the German Chancellor starts to believe that the single currency is too weak.
Currency wise, we think that the EUR/USD pair is going towards 1.10 in the short-term. We therefore believe that there is no much time before markets start to price back economic uncertainties in the Eurozone.
