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- Euro Under Pressure Ahead of Expected ECB Rate Cut, Credit Easing Announcement
- British Pound Could Maintain Strength into Next Week If BOE Maintains Neutral Stance
- Australian Dollar Could Continue Rally Next Week, Canadian Dollar to See Key Employment Data
US Dollar, Japanese Yen Lose Ground in Quiet Day of Trading
The US dollar and Japanese yen lost ground during a quiet day of trading on Friday as European markets were closed for the May Day holiday. Looking to data releases, the increase in ISM manufacturing for the month of April was better than anticipated, as the index rose to 40.1 from 36.3. Readings below 50 - where PMI has remained for the past fifteen months - signal a contraction in activity, but overall, the data indicates that the contraction is occurring at a slower pace. A breakdown of the report reflect similar results, as components ranging from prices paid to production to new orders remained well below 50, but managed to register slight improvements. On the other hand, factory orders slipped 0.9 percent, but this was for the month of March and is too much of a lagging indicator to glean significant information from.
Meanwhile, the final reading of the University of Michigan consumer confidence index for April was revised up to 65.1 from 61.9, and represents a large increase from March, when the index hit 57.3. A breakdown of the index shows that sentiment on economic expectations improved far more than opinion on the present situation, suggesting that if consumers do not see signs of recovery for themselves in coming months, sentiment could fall lower once again.
Looking ahead to next week, there will be a handful of US indicators, including ISM non-manufacturing and non-farm payrolls. Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have improved somewhat in April as the Institute for Supply Management index is estimated to rise to 42.0 from 40.8. Also, the Friday release of US NFPs is sure to garner a lot of attention as the report is forecasted to show that the economy lost 610,000 jobs in April. This will mark the sixteenth straight month of job losses and the sixth month in which job losses amounted to more than 500,000. However, the one event that may determine the direction of risk trends in the near-term is the US government's announcement of their stress-tests on the country's 19 biggest financial institutions. This statement was deferred until the market close on May 7 from May 4 amidst objections from banks about the outcomes, which suggests that the news could be extremely market-moving, especially for the Japanese yen crosses, but low-yielding and high-yielding currencies in general.
Euro Under Pressure Ahead of Expected ECB Rate Cut, Credit Easing Announcement
The euro was one of the weaker major currencies on Friday, gaining only against the Japanese yen and US dollar, and the weakness could linger through next week. According to a Bloomberg News poll of economists and Credit Suisse overnight index swaps, the ECB will cut rates by 25 basis points to 1.00 percent on Thursday morning. A reduction in line with Bloomberg's estimates could exert bearish pressures on the euro, but where the currency ends the day may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Many ECB members have indicated that they will announce unconventional measures following this meeting, which many have taken to mean credit easing, and if Trichet makes such an announcement, the euro could tumble. On the other hand, if the ECB leaves rates unchanged, indicates that they have no intention of bringing interest rates lower in the near term, or if they put off credit easing, the euro could rally.
Related Article: Euro Strength Suggested by Candlestick Patterns
British Pound Could Maintain Strength into Next Week If BOE Maintains Neutral Stance
The British pound was the strongest of the majors on Friday, as lackluster price action allowed the currency to sustain its recent gains. Next week, the Bank of England is expected to leave rates unchanged for the second straight month. Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at the minutes from their April policy meeting showed that the MPC voted unanimously in favor of leaving the Bank Rate at 0.50 percent and to continue their quantitative easing (QE) program. They also said that there was a high degree of uncertainty over the amount of asset purchases that would be necessary to keep inflation at target, and if the evidence warranted it, the Committee could reduce or expand their program. Ultimately, how the British pound responds will likely depend on the BOE's QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK's currency.
Australian Dollar Could Continue Rally Next Week, Canadian Dollar to See Key Employment Data
The Australian dollar gained against the US dollar on Friday, furthering the AUD/USD rally following the pair's break above the 200 SMA on Wednesday. At the start of next week, the pair is going to face major event risk as the Reserve Bank of Australia is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday, after surprisingly cutting the rate by 25 basis points to 3.00 percent. However, the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. After the central bank's last meeting, RBA Governor Alan Bollard said, The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead, suggesting that further reductions were unnecessary. As a result, it will be important to look to Bollard's statement, as signs that the RBA may consider cutting the cash rate target again eventually could weigh on the Australian dollar, while indications of a broadly neutral bias could support the currency.
Meanwhile, the Canadian dollar saw little price action on Friday, but ended the week as the strongest of the majors. The currency faces downside risks next Friday though, as the Canadian net employment change is forecasted to have fallen by 50,000 during April, marking the sixth straight month of job losses. Furthermore, the unemployment rate is anticipated to have risen to match July 1998 high of 8.3 percent from 8.0 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
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Written by: Terri Belkas, Currency Strategist for DailyFX.com