Dollar: Wages Watched. Bullish.
Watch: GDP, PCE, FOMC, Non Farm Payrolls.
We remain selectively long dollar against the disinflationary currencies (EUR, CHF and SEK) and those at risk of rising bond yields (CAD). USD has remained very well supported since the beginning of the month, and has in fact gained positive momentum despite the US CPI only just meeting expectations. There are many data releases we will be watching this week; however, the market will emphasize the wages component of the employment report as the Fed is looking at this.
Euro: EUR Downside Pressure. Bearish.
Watch: German CPI.
We believe the EUR/USD has now traded a top and the recent break lower of 1.35 has strengthened our bearish view, suggesting that there is further to go. We have found the EUR is the G10 currency most exposed to recent geopolitical events, which is bearish for the currency. This week, we will be watching the German CPI data release. A weak number here will emphasize the disinflationary pressures facing the Euro area and the ECB, and would weaken the currency.
Yen: Inflation in Focus. Bullish.
Watch: Unemployment rate, Retail Sales, Industrial Production.
We expect the JPY to remain supported, especially on the crosses, and expect the USD/JPY to move down to 98 in the coming months. the USD/JPY has been trading within tighter ranges, forming a triangle, which if it breaks, would send bearish JPY signals. The risk to this view depends on how inflation develops over the coming months. If (ex tax hike) inflation comes in below 1%, the markets may start to question the effectiveness of Abenomics and whether the BoJ may ease further to combat this.
Pound: Scope for Further Longs. Bullish.
Watch: Mortgage Approvals, Consumer Confidence, PMI.
UK data has continued to cool, but we note that it remains robust. We believe this will continue to offer support to sterling, and while we could see some further consolidation over coming days, we remain GBP buyers on dips.
Aussie: AUD Support on Crosses. Bullish.
Watch: Building Approvals, PPI 1.2%.
Over the medium term, we expect the Australian dollar to gain due to strong inflows into government bonds and an increase in export volumes. Moody’s has commented that risks from sharp increases in house prices are only in certain areas and not yet in the larger cities.