The dollar continued to recover on Wednesday following stronger-than-expected US economic data. The greenback has been in a recovery mode since Tuesday and accelerated after both the ADP employment report for August and the 2nd estimate of Q2 GDP came out much better than expected.
These data are more than welcome for FOMC policymakers, who are in the very difficult position to decide the proper timing for the next increase in borrowing costs. Actually, yesterday’s releases helped the probability for another rate hike by year-end to rise to near 41% from roughly 33% on Tuesday. If the official jobs data tomorrow confirm that the US economy enjoyed another month of stellar employment gains, that probability could rise further.
Having said that though, we have to repeat that the biggest determinant on whether the Fed will proceed with another hike this year is inflation. The minutes of the July gathering showed that the number of policymakers who are concerned with regards to inflation has increased. As such a decent rebound in prices is needed to make some of them change their mind. The next CPI data are scheduled for the 14th of September, less than a week before the Fed meets to decide on policy. Although a single improvement may not be enough to guarantee a September hike, it could revive hopes that more encouraging prints may allow that to happen in December.
Eurozone inflation data take center stage
Today, Eurozone’s preliminary CPIs for August will take center stage. The forecasts are mixed, with the headline rate expected to tick up and the core rate anticipated to tick down. We share the view for an uptick in the headline rate, but we see the risks surrounding the core forecast as tilted to the upside, perhaps for an unchanged rate, or even a fractional increase.
We base our view for the headline rate on the bloc’s composite PMI for the month, which showed that output prices rose at the fastest pace in three months. In addition, Germany’s CPI rate came in higher than anticipated, which enhances the likelihood for a similar reaction in the bloc’s print. As for the core rate, the yearly change in oil prices remains close zero, which makes us believe that if the headline inflation rate indeed increases, the core rate may move in a similar fashion. Any positive surprise in these rates could heighten speculation that the ECB is set to announce some changes to its QE program soon and thereby, bring EUR under renewed buying interest.
EUR/USD continued sliding yesterday, falling below the support (now turned into resistance) of 1.1900 (R1). Although the rate may continue a bit lower and perhaps challenge the key support of 1.1830 (S1), we still believe that the broader path remains positive. On the daily chart, the pair continues to trade above the medium-term uptrend line taken from the low of the 17th of April. Encouraging inflation prints from Eurozone today may be proven the catalyst for a rebound from near the 1.1830 (S1) support. A break back above 1.1900 (R1) may confirm the rebound and could set the stage for extensions towards the round number of 1.2000 (R2).
As for today’s events:
Besides Eurozone’s CPIs, we get Canada’s GDP data for Q2. Our own view is that the nation’s economy may have grown at the same pace as previously, with downside risks. Even though April’s and May’s average monthly GDP is roughly equal to the average of the Q1 monthly prints, the soft retail sales for June suggest that the economy may have lost some momentum towards the end of Q2. A potential slowdown could hurt the Loonie somewhat on the news, but we doubt that it will have much effect on the elevated market expectations regarding another BoC rate hike this year, as a slight slowdown would still be in line with the Bank’s latest forecasts.
USD/CAD edged north yesterday following the strong US data. The rate emerged above the resistance (now turned into support) of 1.2600 (S1) and now looks to be headed towards the 1.2700 (R1) barrier, defined by the peak of the 18th of August. A slowdown in Canada’s economic growth may help the pair to reach that level and if the bulls are strong enough to break it, then we may see extensions towards our next resistance of 1.2775 (R2).
As for the bigger picture, although USD/CAD may trade higher for a while, it remains below the longer-term downtrend line taken from the peak of the 11th of May. This combined with the fact that on the 29th of August the rate failed to break the key support of 1.2415 (S3) and instead formed a low fractionally higher than that level, make us take the sidelines with regards to the overall outlook of this pair. The picture may become clearer next week when the BoC meets to decide on interest rates.
From the US, we get personal income & spending, as well as the core PCE price index, all for July. Both the income and spending rates are expected to have risen from the previous month, while no forecast is available for the PCE index. Given that the core CPI rate for the month remained unchanged, our own view is that the core PCE rate may have held steady as well. We also get the nation’s Chicago PMI for August, pending home sales for July, and initial jobless claims for the week ended August 25th.
We have two speakers on the agenda: BoE MPC member Michael Saunders and Dallas Fed President Robert Kaplan.
EUR/USD
Support: 1.1830 (S1), 1.1730 (S2), 1.1660 (S3)
Resistance: 1.1900 (R1), 1.2000 (R2), 1.2100 (R3)
USD/CAD
Support: 1.2600 (S1), 1.2540 (S2), 1.2415 (S3)
Resistance: 1.2700 (R1), 1.2775 (R2), 1.2860 (R3)
