Q1 was revised higher to +0.9% from previous 0.6% mainly due to rising net exports and higher business investment.
Jobless claims rose 4K last week to 372K from an upward adjusted 368K, with the 4-week average down 2.5K to 370.5K. Continuing claims remain on their upward trajectory, rising 36K to 3.1 million.
Dollar strength broadens on further declines in oil prices and rising US bond yields in the aftermath of stronger than expected durable goods orders, which are increasing the odds of a Q3 Fed rate hike. Worsening UK home prices and rising German unemployment is also accelerating the declines in European currencies against the greenback.
The combination of stronger than expected US figures with renewed calls by Saudi Arabia to increase output up to 9.5 million bpd in June are accelerating the dollar’s gains. It is too early to call the end of the current oil rally as key support has yet to be tested at the interim levels of $123 and $115. A print of these figures is likely to be accompanied by dollar gains, which are most likely to hold against CAD and GBP, currencies whose central banks are in the midst of easing cycles. Dollar strength is to accelerate on elevated probabilities of protracted pause in US interest rates. We do not expect a Fed hike to take place this year as credit conditions are already tightening in the LIBOR market and banks are tightening credit standards. Rising oil prices are also expected to prolong their bite on US consumers as support is seen holding at $115.00 per barrel.
Two important elements are facing OPEC ahead: The prospects of weakening global demand and the state of the dollar. The latter factor may induce OPEC into accepting lower prices, especially as a way to demonstrate good faith with the US and major oil importing nations. But OPEC is too cautious to repeat the error of late 1997 when it raised output at the same time that Asian demand came to a virtual standstill due to the Asian crisis and helped send prices below $10 per barrel.
Euro Eyes $1.55
Euro has lost a full cent from yesterday’s $1.5650, in line with our prediction for $1.5550. The next key support stands at $1.55, which will largely depend on next week’s release of US payrolls as these will be considered instrumental in determining Fed funds expectations for the August and September meetings. But emerging hawkishness from ECB officials is expected to continue underpinning the pair at the $1.55 figure into the next week. Upside capped at trend line resistance of 1.5680.
USDJPY Faces Pressure at 105.70
Yen hit by a double whammy of elevated high oil prices (still considered high at these levels for oil-dependent Japan) and improved risk appetite as seen in the overnight 415-point rally in the Nikkei. But as long as US stocks face persisting obstacles at 1,400 and 12,800 in the S&P500 and the Dow respectively. Yen crosses may temper their gains, with USDJPY capped at 105.70, EURJPY met out 164.50 target before 163.60 and GBPJPY capped at 208.30.
Cable Eyes $1.9660
UK home prices continue on the decline, falling by their fastest pace since 1991 as measured by Nationwide home price index, which fell 2.5% in April and 4.4% y/y. Rising risk appetite as a result of the US Q1 GDP revision may ease cable higher towards $1.9820, facing increased pressure at 1.9850. At that point, the market is to find little conviction in further bidding up sterling, and prices are expected to revisit 1.9650.
Aussie to Refuel Towards 0.9630
The combination of better than expected US GDP and rising jobless claims is to work in favor of the high yielding Aussie, with s rising risk appetite boosting the pair and increased doubts with US labor market weighing on the USD. We expect gains to recall 0.9630 and 0.9650, while is cemented at 0.9575.