FX Weekly: Another jump in US inflation unlikely to impact the greenback’s downward spiral
USD: This week’s expected inflation spike shouldn’t impact the greenback
Spot
DXY90.31
Week ahead bias
Mildly Bearish
Weekly range
89.90 – 90.70
1 month target
90.00
Friday’s April non-farms payroll report was significantly below consensus and promoted a dollar sell-off which has likely relieved pressure from the Fed in the short term to take a more bullish stance. That said, despite the data miss, most analysts continue to remain very positive on the recovery story. The expected recovery coupled with the lower for longer rhetoric is likely going to create a boom in the equity markets over the next several months.
In the week ahead, April’s inflation report from the U.S. will be the highlight for the week. Economists are expecting at 3.7% year-on-year rise which seems to have already been priced into current levels. Don’t expect a big change in the Fed’s rate expectations as they won’t react to higher inflation just yet. The final data point of interest will be Wednesday’s $41bn 10-year Treasury auction. Analysts expect a rise in treasuries but as long as the bond market proves resilient, there remains room for the USD to weaken over the short term.
CAD: Friday’s disappointing employment data unlikely to pressure the loonie
Spot
USD/CAD1.2144
Week ahead bias
Mildly Bearish
Weekly range
1.2040 – 1.2210
1 month target
1.2100
Last week the loonie enjoyed a very strong week until Friday’s employment data. The Canadian economy saw a significant drop in employment in April, likely spurred on by Covid-19 restrictions nationally. The disappointing US NFP data didn’t do the loonie any favours either given how highly intertwined the Canadian economy is to the U.S.
Despite the weak employment data, the outlook for the CAD looks very positive. The divergence in policy between the BoC vis-à-vis the Fed is likely to support the loonie, while faster vaccine rollouts in Canada will certainly support economic data flow from the Canadian economy over the coming months. There are no major economic data releases this week leaving the loonie to trade on broader market themes. The CAD is likely to remain supported on the back of global risk-supportive mood.
EUR: The EUR/USD likely to push higher given the soft USD environment
Spot
EUR/USD1.2140
Week ahead bias
Mildly Bullish
Weekly range
1.1980 – 1.2290
1 month target
1.2200
The upside pressure on the EUR/USD should continue through the week as the USD remains under pressure. This week will be a very quiet week for EZ data - May German ZEW on Tuesday and March industrial production on Wednesday will have very little impact on the euro, meaning that EUR/USD direction will be largely driven by the wider USD story.
The outlook for the EUR/USD is improving and we expect that the eurozone data should rebound as we move into the summer with ECB tapering speculation growing. The improving EZ economy, expected ECB tapering and a generally soft USD all point to significant upside for the EUR/USD in the coming months.
GBP: All eyes on the 1.40 level for the GBP/USD
Spot
GBP/USD1.3977
Week ahead bias
Bullish
Weekly range
1.3860 – 1.4180
1 month target
1.4400
This coming week should be quieter after the BoE meeting and the Scottish election last week. The BoE tapering announcement had a muted impact on the GBP as the reduction in purchases wasn’t very aggressive. As for the Scottish elections, though still unknown, should have no impact on the GBP as a referendum is unlikely to materialize any time soon. Analysts are calling for the GBP/USD to move above 1.40 helped by a rising EUR/USD and a sharp economic recovery.
Datawise, this week’s main focus will be on the UK’s Q1 GDP (Wednesday). Analysts expect a 1.5% YoY print which should further underscore a very strong economic recovery in Q2 and be supportive of the GBP/USD.
Currency Chart
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