Dollar Recovers On Employment Hopes

USD

The dollar recovered marginally on Tuesday on optimism the Fed might reduce its QE ahead of key employment data on Friday. On the data front, the Trade Balance widened to -40.3bn from -38.8bn –, but this was not as much as the -41.0bn expected. The New York ISM fell to 54.4 from 58.3 when a fall to 55.0 had been expected. IBD/TIPP Economic Optimism in June rose to 49.0 from 45.1 but this was not as much as the 50.0 forecast. Atlanta Fed's Lockhart talked down the idea of expanding asset purchases, and put forward the case for tapering asset purchases by ,summer. This echoes Fed Williams words on Monday. however, like Williams Lockhart is a non-voting member, so his comments don't have the same impact. Commentary is due from Esther George tonight. Ms. George is the one member of the FOMC to vote against continued asset purchases at the May meeting, and there could be an impact on the dollar if she puts forward a convincing case for ending QE, or weakness if she shifts to a more accommodative stance. Wednesday could be a volatile day for markets, as the ADP Employment Change will show the state of the labour market. More data slated for today: Non-manufacturing ISM and the Fed's Beige Book in the evening.


EUR

The euro traded higher versus most counterparts, although it weakened slightly against the dollar. On the data front, eurozone Producer Prices in April fell by -0.2% from 0.6% previously, and 0.2% expected and -0.6% in April from -0.2% previously when it had been expected to remain unchanged. The deflationary trend could increase speculation the ECB could move to make its policy more accommodative at the next monthly rate meeting on Thursday. This could be either via another rate cut - perhaps of 25bps – or by reducing the deposit rate below zero. Generally, it seems such a radical proposal is still unlikely, given recent commentary from most ECB officials. However, the rise in unemployment to a record high 12.2% on Monday and Tuesday's deflationary producer prices could force committee members to change their stance and take action.


GBP

The pound fell on Tuesday despite a better-than-expected rise in Construction PMI in May, which increased to above the 50 level distinguishing contraction from expansion. This was higher than the rise to 49.8 expected after the 49.4 recorded previously. It was broadly in line with expectations generated following the better-than-expected Manufacturing PMI data released on Monday. Wednesday will see the publication of Services PMI data, which will also now probably show a rise, given the Services usually performs better out of the 3 even when Manufacturing and Construction are down. BRC Sales like-for-like in May rose by 1.8%, which was better than the expected 1.3% rise from -2.2% previously.


JPY

The yen weakened on Tuesday after risk appetite fell following an improvement in the outlook for the U.S, with expectations increasing that the Fed might taper QE. On the data front, Labour Cash Earnings rose by 0.3% from -0.9% previously. Other data showed a rise in the Monetary Base to 159.2tr yen from 155.3tr previously. Year-on-year it showed a rise of 31.6% from 23.1% previously. The result was not surprising, considering the increase in stimulus from the BoJ. The yen is likely to be affected by U.S data out on Wednesday and Friday because of the focus on whether the Fed will taper its asset purchases in the light of improving outlook. If the data is better-than-expected, it could lead to further weakness for the yen as the dollar rises and risk appetite increases.