USD: To hold onto, but not extend upon, recent gains.
Having already risen over 1.5% in the past month, USD is unlikely to extend its gains ahead of Friday’s nonfarm payrolls. Indeed with Wednesday’s FOMC meeting already deemed a non-event, and another moderation in the advance release of core-PCE anticipated, USD is more likely to pause for breath until NFP.
However, this pause will be short-lived if, as recent declining unemployment claims suggest, another strong employment number is forthcoming. Indeed when incorporating latest weekly claims into a 3-month average measure (opposite), NFP’s improving trajectory appears more likely to accelerate than slow, thereby supporting recent Fed speculation. Moreover, even if Friday’s notoriously volatile series disappoints, the underlying employment trend is turning USD supportive.
EUR: Price data to support ECB patience.
The recent improvement in some forward looking Eurozone activity indicators has failed to stifle ECB policy speculation pressures upon EUR. This outcome is somewhat surprising given a majority of governing council members have been explicit in their preference for a ‘wait and see’ approach.
Even so, on a relative carry basis EUR is underperforming and thus should remain under pressure against many G10 currencies this week, with the exception of USD where we expect a similar pause ahead of NFP.
Key in maintaining this EUR pressure will be German CPI Wednesday and the Eurozone Flash HICP estimate Thursday. Both are expected to remain soft keeping attention on the ECB.
Therefore as Europe heads into its summer vacation period, the EUR should fall further – albeit at a slower pace than last week.
We therefore maintain a short EUR/USD position in our portfolio.
CA