USD consolidates as the Fed stays the course
As broadly expected, the Federal Reserve held rates steady on Wednesday and made minor adjustment –mostly cosmetic – to the accompanying statement. Amid the release of the latter, the US dollar tumbled against most of its peers, which suggests that investors were expecting a more hawkish statement, but quickly bounced back to its pre-publication level.
EUR/USD jumped to 1.2026 before easing to 1.1938 in late US trading session. The single currency is currently stabilising around 1.20. The latter level is key technical at it corresponds to the 200dma as well as a strong psychological threshold. A break to the downside would trigger further dollar strength. However, the buck has been overbought recently and a stabilisation, if not a slight weakening, of the buck would seem reasonable.
According to the latest data released by ADP, the private-sector employment remained strong in April with 204k jobs added. This is slightly above median forecast of 198k but given the fact that March’s figures were downwardly revised to 228k from 241k, the overall sentiment was rather neutral in the end. Nonfarm payrolls, which are due for release tomorrow, are expected to come in at 192k versus 103k in March. The unemployment rate is expected at 4%, while median forecast for wage growth stand at 2.7%y/y. For the last couple of week, the market is significantly bias in favour of the dollar; therefore an upside surprise in the jobs report could set the stage for further dollar strength. In such a situation, a return towards the 1.15-1.1736 area would be inevitable.
Italian GDP progresses in Q1 amid slowing EU growth
Whereas the EU economy is losing steam in Q1 due to hovering commercial tensions during the period, presenting weaker Q1 gross domestic product (GDP) data (q/q: +0.40% and y/y: +2.50%), Italy is showing the way. Italian economic growth reached 0.30% during first quarter (1.40% y/y), in line with fourth quarter 2017 and maintained at constant pace since third quarter 2013. In the middle of continuing government coalition talks, which slowly confirms the formation of a government composed of right-wing League Party with the Five Star Movement, the potential of stronger economic growth from the third largest European economy is expected, as GDP growth highs from 2011 could be reachable (above 2%), if economic background allows it.
As unemployment rate retreats among Eurozone countries since 2013 high, supported by an acceleration in producer prices, increasing wage growth and improving consumer confidence as of April, we would suggest that the European economy is set to rise upward. EU diplomatic stance appears to turn in its favor, as US commercial pressures seem gently to vanish, thus supporting exporting industries within the country.
It is only a matter of time before the EUR/USD pair strong decline below the 1.20 range recovers from recent low at 1.1938 (02/05/2018). We would therefore suggest that an increase above 1.2005 is feasible in the very short-term.
