FX Weekly: US data expected show a strong recovery vis-à-vis a dovish Fed
USD: The Fed is going to have a communication problem
Spot
DXY91.24
Week ahead bias
Mildly Bullish
Weekly range
90.50 - 91.55
1 month target
90.00
Last month saw the greenback suffer a 3% sell-off. Based on historical trends, May is usually a better month for the USD and the coming few weeks may provide an opportunity for a reprieve to the current downtrend. At the forefront on most analysts’ agendas is the commitment of the Fed’s dovish policy amidst a US economy that is unquestionably gaining momentum.
The week ahead should provide further insight into a rebounding US economy including the April ISM and employment releases with analysts are looking for over a million jobs added. Fed communications and hot US data in the week ahead pose upside risks to US rates and the dollar.
CAD: Is the loonie set to soar?
Spot
USD/CAD1.2315
Week ahead bias
Mildly Bearish
Weekly range
1.2170 – 1.2350
1 month target
1.2300
The loonie was the best performing G10 currency this past week. The Fed’s ultra loose monetary policy vis-à-vis the BoC which has already begun tapering has allowed the CAD to appreciate quite rapidly over the past month. This divergence coupled with supportive oil prices has created an environment for the CAD’s appreciation.
What may have driven the strong outperformance of CAD last week were indications that the Covid-19 emergency is starting ease, with the contagion curve flattening. Additionally, a continued ramp up of vaccine rollouts has added fuel to the strong recovery story in the Canadian economy. This week’s jobs data for April may feel the negative impact of those new restrictions but considering the improved virus situation markets may dismiss a set-back in the employment as only temporary. A solid domestic recovery narrative in Canada all points further CAD strength over the coming months.
EUR: Data pointing to a strong Q2 recovery
Spot
EUR/USD1.2028
Week ahead bias
Mildly Bearish
Weekly range
1.1980 – 1.2150
1 month target
1.2200
Last month showed that the Eurozone was entering a technical recession, however, more recent data prints were a little better than expected with many economic indicators pointing to the region rebounding in Q2. Headline inflation jumped back to 1.6% in April, and like the Fed, the ECB will face a communication challenge in Q2. In the week ahead, the markets will be looking for any insights that ECB speakers may share prior to the June 10 ECB meeting.
Other than comments from ECB speakers, focus will continue to remain on the acceleration of vaccine rollouts and the easing of regional lockdowns in various hotspots throughout the region.
GBP: BoE will drive direction this week
Spot
GBP/USD1.3860
Week ahead bias
Mildly Bullish
Weekly range
1.3760 -1.4010
1 month target
1.4100
This coming week will be an exceptionally busy week for the GBP with focus on Scottish election and the BoE meeting. Though the Scottish election may bring negative headline news, the GBP shouldn’t react too negatively as a Scottish referendum could be years away.
As for the BoE April meeting, most analysts expect to see a series of upgrades to the Bank’s forecasts which could lead to suggestions of QE tapering in the months ahead. While this should come as no surprise, on the margin it should be GBP positive, particularly after the tough month of April for sterling. Expect GBP/USD to re-test the 1.40 level.
Currency Chart
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