THE BIG PICTURE
· Officials are still trying to clarify for the markets what exactly the Fed’s intentions are with regards to “tapering off.” NY Fed President William Dudley’s speech on the labor market for recent graduates turned into the event of the day as emphasized the difference between “tapering off” and “stopping” and also the difference between “tapering asset purchases” and “raising interest rates,” which he made clear is not going to happen for a long time. While he expressed confidence in the economy, he also reiterated that the Fed’s plans are based on reaching its economic targets, not a calendar, and if the economy does not behave as expected they could prolong QE. His comments were echoed by Atlanta Fed President Lockhart, who said markets may have misread the Bernanke’s comments and that low rates “will remain in place for a considerable time after the end of asset purchases”. As a result, Fed Funds expectations for 2015 fell by around 6 bps and 10-year bond yields were down around 2 bps. They’re now down 15 bps from their peak on Tuesday.
· It’s notable that USD gained against most currencies despite what was apparently a less hawkish view on interest rates. This suggests to us that while the currency is gaining support from interest rate differentials and the difference in policy expectations, it is also gaining strength from the relative strength of the US economy. For example, while Dudley said he saw “persuasive evidence of improved underlying fundamentals for much of the private sector of the US economy,” yesterday’s revisions of the UK GDP data showed that UK disposable income plunged 1.7% qoq in Q1, the worst drop since 1987. The weakness in the Eurozone needs no discussion. Japanese data released overnight showed some recovery there (industrial production and retail sales up) but good Japanese data tends to go with a weaker yen.
· There is a lot of data to be released today, including UK house prices, German retail sales, producer prices from France and Italy, French consumer spending, German and Italian consumer prices, Italian business confidence, the Chicago PMI, U of Michigan consumer confidence (final for June), and Canadian GDP for April. The market expects a slight rise in German inflation to 1.7%, near the ECB’s 2% target. That could prove EUR-positive as it lessens the pressure on the ECB to ease policy, if indeed the ECB is still aiming its policy at inflation rather than growth.
The accurate economist estimates for initial jobless claims, personal spending and the PCE deflator did not trigger a major move on the pair, however the largest increase in pending home sales in 1 ½ years, which added to data that show a housing rebound, drove EUR/USD to 1.3000 round number support. A rebound to 1.3055 materialised thereafter following Lockhart’s dovish comments. A retracement thereafter found support at 1.3030 with the pair rebounding overnight, finding significant resistance at 1.3075.
Strong, well-tested resistance comes at 1.3075 which sees the 38.2% retracement level of the July 2012 – February 2013 up move, the 50-day MA as well as the 200-day MA. Initial support comes at 1.3055 and thereafter at 1.3030 and 1.3005, with Fibonacci support at 1.2980. Resistance above 1.3075 is found at 1.3115 and 1.3160.
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