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Euro/dollar Could Correct Itself on US Labor Market Data

The result of the ECB’s meeting yesterday was to leave interest rates unchanged. During a press conference, the head of the central bank, Mario Draghi, was optimistic in his assessment of the current situation in the economic union and he pointed to a further renewal and strengthening of demand, which is being propped up by economic stimulus.

However, it’s obvious that the current program of asset purchases hasn’t led to stable and long-term price growths to the level of 2%. The plan shall run until September 2016, but, as Erkki Liikanen, member of the ECB Governing Council and Governor of the Bank of Finland stated, the program could be extended if the inflation rates don’t meet the desired targets. Furthermore, the ECB earlier announced its intention to acquire more assets before the summer inactivity on the market, when the amount of expired bonds is traditionally high and the issuance of new bonds is low.

Labor market data from the ADP was published yesterday. The indicator showed a May rise to 201,000 against an expected 198,000 and April’s 165,000. The improved situation has come with that of export trade: the deficit fell to 40.88 billion dollars in April from 50.57 billion in March. The composite ISM for the non-manufacturing sector fell from 57.8 to 55.7 in May. Positive data was also out in the form of the Fed’s Beige Book; although optimism for investment in the European currency was higher than that for the dollar.

The euro/dollar received a serious impulse for growth and is around 1.1353. Looking at things in the short-term, the pair will be affected by tomorrow’s adjusted Q1 GDP data for the Eurozone, with the NFP and unemployment rate from the US due to add to the movements. There’s reason to say that American labor market data could exceed expectations: in this case it’ll be the euro/dollar conceding some of its recent gains.

The Fed Saint Louis President, James Bullard mentioned in his speech that market participants are right to suggest that the US Fed will not raise its interest rates in its June meeting due to weak economic data. He had earlier said that the rates would be put up “sooner, rather than later,” but today did a U-turn, saying that it’s be better if it was done on the basis of decent economic performance.

Another important risk factor is Greece and the Grexit. An agreement hasn’t yet been reached and differences of opinion between the negotiators are many.

April retail sales in Australia pretty much stood on the spot in comparison to data from March, thus being worse than the 0.3% expected rise. Australia’s April balance of trade deficit increase by more than three times since the value of raw material exports coming out of the country has fallen sharply, whilst a growth in the import of capital goods has been witnessed.

The balance of trade deficit reached 3.9 billion Australian dollars in April against 1.2 billion in March. The Australian deficit is much higher than the forecasted 2.1 billion Australian dollars. The export of coal and other commodities has fallen due to bad weather conditions, whilst the falling price of raw materials has increased the pressure on metal ores and minerals, including that of iron ore. The export cost fell by 6% in April (MOM). Simultaneously, imports increased by 4% due to a growth in the price of machine tools and industrial equipment by 69%.

The Australian dollar fell to 0.7707 against its US counterpart after the release of weak data on trade and retail sales. It later corrected part of the losses back to 0.7752. Further movements on the pair will be based on tomorrow’s US labor market data.

The employment ministry will set the rate for the American/Canadian which has been quite erratic. Yesterday’s data showed that Canada’s trade deficit in April reached 2.97 billion Canadian dollars against a reassessed March value of 3.85 billion. However, this positive data couldn’t affect the Canadian dollar which caved to 1.25 and then quickly won back a large part of the loss. Strong data on the American labor market could easily return the rate back to 1.25 and higher from a present rate of 1.2455.

As expected, the end result of the Bank of England’s meeting today was to keep the rate at 0.5% and asset purchases at 375 billion pounds. The minutes of the meeting will be published on 17th June.

The pound/dollar is gathered pace before the meeting and reached 1.5440. After the meeting it dropped slightly and at the moment of writing this review it was trading around 1.5417.

Today it’s worth looking at the publication of data on initial unemployment benefit applications in the US and also have a listen to what Daniel Tarullo, member of the FOMC, has to say.

Attention:

Forecasts which are made in the review constitute the personal view of the author. Commentaries made do not constitute trade recommendations or guidance for working on financial markets. Alpari bears no responsibility whatsoever for any possible losses (or other forms of damage), whether direct or indirect, which may occur in case of using material published in the review.

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