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Yen Poised to Extend Gains as US GDP Fails to Ease Growth Fears
A quiet economic calendar in European trading hours is likely to see the markets looking ahead to the first-quarter US GDP report. Expectations suggest output grew at an annualized pace of 3 percent, marking a strong recovery from the paltry 0.4 percent increase recorded in the three months through December 2012. The outcome may not offer much support to risk appetite absent a meaningful upside surprise however.
Much of the weakness that has recently spooked the markets about the prospects for US recovery has come from March data. That means the cumulative GDP figure will be inherently skewed toward the far more encouraging results seen in the first two months of the year. This is arguably old news at this point and may not alleviate worries about another coordinated global downturn in the pipeline.
Indeed, S&P 500 futures are pointing lower ahead of the opening bell on Wall Street, hinting at a risk-averse mood heading into the GDP announcement. The standout result following a print that fails to underpin sentiment is likely to be a further recovery in the Japanese Yen as an unwinding of carry trades encourages gains in the go-to funding currency. The unit is already on the upswing following astatus-quo BOJ policy announcement overnight.
Crude Oil, Gold Prices Look to US Data for Guidance
Commodity prices are treading water in European trade as the spotlight turns to US Consumer Confidence figures.Expectations call for a narrow increase to 61.0 in April compared with 59.7 in the prior month. US economic news-flow has increasingly underperformed relative to expectations since late March however, hinting analysts continue to underestimate the degree of slowdown playing out in the world’s top economy and opening the door for a downside surprise.
Such an outcome may weigh on risk appetite, punishing cycle-sensitive crude oil and copper prices. The implications for precious metals are a bit clouded however. On one hand, a risk-off scenario has scope to boost haven flows into the US Dollar, sending both gold and silver de-facto lower. Coming against the backdrop of the FOMC policy meeting however, a soft print may be interpreted to support the case for continuity of aggressive Fed stimulus, sending the greenback lower and offering support to anti-fiat assets.
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Euro Rebounds from a Session Low Despite Unexpected Inflation Drop
The economic picture of the Euro-zone has been further shaped this morning by a plethora of economic releases that included a multi-year high for German consumer confidence and a multi-year low for Euro-zone inflation.
The Euro set a session low against the US Dollar at 1.3053, right by the 38.2% retracement of the rally from the pair’s all time low to its all time high. Furthermore, EUR/USD actually rebounded about twenty points following the three-year low Euro-zone inflation. Along with the consumer prices estimate, Euro-zone unemployment was also reported at an all-time high.
Besides for the consumer confidence, we also found out that German unemployment rose for a second month, and the unemployment rate remained at 6.9%. Spanish GDP fell 0.5% in the first quarter according to today’s initial estimate, slightly better than the 0.8% economic decline in Q4 of 2012.
In the UK, BoE’s Miles said he sees inflation remaining at the current level, most recently reported at 2.8%. He said he sees annual inflation falling closer to the BoE’s target 2.0% rate in early 2014.
Yen May Rise vs. US Dollar, Fall Elsewhere on FOMC and ISM
The major currencies consolidated against the US Dollar in overnight trade. The Australian Dollar narrowly underperformed, weighed down by a narrowly disappointing Chinese Manufacturing PMI reading. The report showed factory-sector activity slowed more than economists expected in April, sending the Aussie as much as 0.2 percent lower against its top counterparts.
Price action is likely to remain lackluster in European trading hours as most of the region’s markets remain offline for the Labor Day holiday. Event risk heats up in the US session however as the Federal Reserve delivers its monthly interest rate announcement and April’s ISM Manufacturing gauge crosses the wires.
The rate-setting FOMC is widely expected to keep the monetary policy mix unchanged but traders will look to the tone of the statement for acknowledgement of the recent weakness in US economic data. Such an outcome will reinforce the likelihood of continuity of aggressive stimulus efforts, which stands to feed risk appetite and boost cycle-sensitive currencies like the Australian, Canadian and New Zealand Dollars.
The ISM report stands to amplify this dynamic. Consensus forecasts see manufacturing activity growing at the weakest pace in four months, compounding the recent run of worrying news releases from the world’s top economy and adding credence to the argument for a dovish Fed posture.
The JapaneseYen may yield a mixed response if this helps to produce a risk-on scenario. The unit may advance against the greenback on a narrowing of the yield differential between the two funding currencies while declining against higher yielders as carry trades follow other risky assets upward.
Pound Rallies as PMI Shows Little Contraction in Manufacturing Activity
THE TAKEAWAY: UK PMI for manufacturing for April beats expectations at 49.8 -> Markit says sector may lighten its drag on economy in Q2 -> Pound rallies
The Pound rocketed to a new 2-month high against the US Dollar, following the report that UK manufacturing activity contracted at the slowest pace in three months in April.
Markit’s Purchasing Managers’ Index for UK manufacturing rose to 49.8 in April, beating expectations for 48.5 and higher than the revised 48.6 PMI result in March. A PMI reported below 50.0 indicates a decline in sector activity.
Output and new orders rose in the manufacturing sector rose for the first time since January, according to Markit. The level of new export work rose for the first time in over a year, but demand in the Euro-zone remained weak. Manufacturing job losses continued for the third straight month in April.
The UK economy grew an unexpected 0.3% in Q1, thereby just missing a triple dip recession after the 0.3% GDP decline seen in Q4. Markit reported that manufacturing acted as a drag on the economy in Q1.“With forward-looking indicators such as new orders and the demand-to-inventory ratio also ticking higher, the sector should at least be less of a drag on broader GDP growth in the second quarter,” according to Markit Senior Economist Rob Dobson.
The Pound rose about forty five points to 1.5585 against the US Dollar in Forex markets, following the UK PMI release. GBP/USD has risen for six straight sessions and may next see resistance at 1.5593, by the 50% Fibonacci retracement of the decline from January’s high to March’s low. Support may be provided by the 1.5500 key figure.
The European trading session has been otherwise very quiet, as most equity markets are closed for May Day. However, the US session may provide volatility, especially for USD based pairs, as the FOMC announces its rate decision.
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Oil, Gold Vulnerable to Disappointing ECB Rate Decision
Commodity prices are treading water in overnight trade as all eyes turn to the European Central Bankmonetary policy announcementamid widespread speculation about a 25bps interest rate cut to address the region’s deepening recession. Taken together, the Eurozone is the world’s second-largest economy and currently the sickliest of the major engines of global output, seemingly making the introduction of added stimulus there a supportive development for risk appetite.
A reduction in the benchmark lending rate alone without an accompanying QE-like non-standard stimulative effort may fail to impress investors however. The market rate to borrow Euros overnight has averaged around 0.1 percent over the past 12 months. That means cutting the ECB benchmark lending rate from 0.75 to 0.5 percent would be essentially moot in terms of lowering regional borrowing costs. Meanwhile, a Bloomberg index tracking Eurozone financial conditions has shown slow deterioration since late January, underscoring the inability of low rates by themselves to secure a supportive funding environment.
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UK PMI for Manufacturing Rises to a Six Month High
THE TAKEAWAY: UK PMI Manufacturing rises to 49.4 in April, a six month high -> BoE predicts muted growth in H1 -> Pound fails to maintain gains
The UK Purchasing Managers’ Index for construction rose to a six month high in April, but failed to send the Pound significantly higher. The PMI for construction was reported at 49.4, beating expectations for 48.0 and higher than the 47.2 index result in March. A PMI below 50.0 indicates a contraction in sector activity, according to Markit.
The UK economy expanded by 0.3% in Q1 on an improvement in the services sector. The BoE predicted muted growth in the first half of 2013, and Governor King said a recovery is in sight in the longer term. Signs of increased economic growth are Pound positive.
However, the Pound was unable to sustain gains following the beat of expectations in the construction PMI release. GBP/USD is trading higher for the seventh consecutive session, but the pair may see resistance around 1.5595, by the cross of a 50% Fibonacci retracement and an upward trading channel.
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Gold to Rise as Crude Oil Declines if US Jobs Data Disappoints
Expectations call for the economy to add 140,000 jobs in April, marking an improvement from the paltry 88,000 increase recorded in March. A relatively supportive outcome is likely to mollify “spring swoon” fears and boost risk appetite, cycle-sensitive crude oil and copper prices higher. In the FX space, the US Dollar is likely to find support as traders play up the Fed’s readiness to adjust the size of monthly asset purchases downward in line with improving economic developments, creating de-facto downward pressure on gold and silver amid ebbing anti-fiat demand.
The possibility of a disappointment seems significant however. April’s economic activity surveys have proven uniformly weak, warning that the worrying signs that began to emerge in March were more than just a temporary blip on the radar. If a soft print does materialize, it would appear just as knee-jerk optimism following yesterday’s ECB rate cut begins to give way to a realization that the move was largely cosmetic. Indeed, moving the benchmark cost of borrowing to 0.5 percent seems hardly supportive for the real economy considering the market overnight rate has averaged around 0.1 percent for nearly a year.
ECB Cuts its Euro-Zone Growth Forecast, Attributes Rate Cut to Inflation
The European Central Bank lowered its growth forecast for 2013 to -0.4% from a previous estimate for 0% growth, and the growth forecast for 2014 was cut from 1.1% to 1%. Furthermore, this year’s inflation forecast was cut to 1.7% from 1.8%, and inflation for 2014 is now forecasted at 1.6%. The ECB’s monthly bulletin further said that risks to Euro-zone economic growth remain to the downside, while the risk to inflation is balanced.
The comments from the May bulleting largely matched Draghi’s comments following this month’s monetary policy decision to cut the interest rate by 25 points to 0.50%. The bulletin said the lower inflation, reported at a three year low of 1.2% in April, allowed the ECB to cut the interest rate. The bulletin further said that lowering borrowing costs will help a recovery later in the year. The bulletin further said that monetary policy will remain accommodative for as long as needed.
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