The dollar has trader softer today

June 2, 2016

FX News Today

FX Update: The dollar has trader softer today, which has driven EURUSD to a one-week peak at 1.1213 and USDJPY to a two-week low at 108.83, although some yen outperformance was a factor in the latter. The yen rallied with as the mood in most stocks markets in Asia remained cautious, while currency strength in turn exacerbated losses on the Tokyo Stock Exchange. The Nikkei 225 underperformed the region notably with a 2.3% loss. The longer-than-anticipated delay to the planned sales tax hike, announced by PM Abe yesterday, was held as a yen bullish view by some, though this shouldn’t affect BoJ policy considerations given disinflationary pressures and with the central bank holding two of the “three arrows” in the Abenomics stimulus plan. A Reuters survey two weeks ago found a strong consensus favouring the BoJ to expand policy by July, via the QQE program and possibly by a deepening of NIRP. Two big external events are approaching, the first being the ECB’s June policy meeting today, and the next being the release of the May U.S. payrolls report tomorrow. The former is not likely to be a market shaker as the central bank is an affirmed wait-and-see stance. The latter will be looked to in context of Fed tightening possibility at the upcoming FOMC on June 14th-15th. The general view at the moment is that after indifferent U.S. data this week, and given Brexit vote in the UK on June 23, the Fed will delay the decision until the FOMC in July.

European Outlook: Oil prices are under pressure and the front end WTI future below USD 49 per barrel ahead of the OPEC meeting. U.K. stock futures are posting small gains, but U.S. futures are also down and leads remain supportive for European bond futures, which already moved higher yesterday, with Gilt futures outperforming. Bund traders were cautious ahead of today’s ECB meeting, with Draghi unlikely to strengthen the dovish message at the moment and instead focus on putting further pressure on governments to implement reforms to complement the accommodative policy.

Poor Global manufacturing PMI’s: Although U.S. data revealed encouraging May gains in the ISM, to 51.3 from 50.8, and in vehicle sales, which we now peg at a 17.6 mln rate from 17.3 mln in April. Unfortunately, we also saw an April pull-back in construction spending after upwardly-revised Q1 gains that lowered GDP growth prospects on net, though we now assume a Q1 GDP boost to 0.9% from 0.8%. The April construction drop likely reflects some give-back of a winter weather-boost, and we still assume a solid spring-season for housing given April strength in pending, new and existing home sales. The PMI data from Asia and Europe was also weak with on the UK showing a move forward.

Canada Q1 GDP disappoints: Disappointing but not Disastrous: Canada’s 2.4% real Q1 GDP gain undershot relative to expectations. While the 0.2% m/m drop in March GDP left a poor hand-off for Q2 GDP, a contraction had already been factored in for that quarter due to the halt in oil production. Hence, Q1 and March GDP do not alter the underlying growth story for Canada in 2016, although the Q1 performance does suggest and even longer path back to sustainable growth than had been previously assumed. The longer wait implies an even more drawn out period of time at currently accommodative rates from the Bank of Canada.

Main Macro Events Today

ECB Meeting & Press Conference  The central bank is widely expected to keep policy on hold at today’s council meeting, leaving the focus on Draghi’s press conference and the updated set of staff projections. We don’t expect a big change to the inflation forecasts, but the growth forecast for this year could be lifted after stronger than expected first quarter growth numbers. Draghi’s overall message though is likely to be the same as the last time around: The ECB is firmly in “wait-and-see” mode and focused on implementing the measures already announced, with the corporate bond purchase program starting this month. The ECB leaves the door to further easing open, but is unlikely to step up the dovish message, as council members increasingly shift the focus to the need for government action and structural forms to complement the ECB’s accommodative policy stance and help lift long term growth potential.

BOE’s Governor Carney speech The new GBP five pound note is being unveiled and the Governor is due to speak, Brexit will inevitably be raised with reporters hanging on to any reference for policy implications.

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