U.S stocks ended the day in negative territory however the U.S Dollar traded higher against all the other major currencies. The greenback was in full bullish mode even against the back of a retrained decline in U.S equities. The Dow Jones Industrial ended the day down 250 points but the decline in the S&P 500 was more modest. FX traders need to watch stocks carefully as the next directional move will determine how the majors trade. Today the Markit Economics’ PMI reports, existing home sales and the FOMC minutes are scheduled on the economic calendar. These reports should boost the U.S dollar to hold onto its gains because during the last Federal Reserve meeting, Janet Yellen and her team upgraded their inflation outlook and hinted the improvements in the economy. Existing home sales should also recover after falling at the end of last year. With all of this in mind, 107.50 is an important resistance level for USD/JPY and an ideal place for profit taking after a 200 pip rally from last week’s low.
Sterling was defiant in the wake of the U.S dollar strength and although the Confederation of British Industry’s Total Trends survey came in weaker than expected, which is a sign of slower manufacturing activity, sterling was supported by the U.K. government’s hope that a Brexit deal will be done by the end of the year. Today the U.K. data has the labor market report which will determine how quickly the Bank of England raises interest rates. Speculators are banking on a move in May but if today’s labor data fails to live up to expectations, those odds, could sink quickly. According to the PMIs, January was a very strong month for job growth but everyone’s focus will be on wage growth as it’s a measure of inflation. Average weekly earnings growth has been hovering at its highest level in 2017 for the past 2 months. That’s difficult to maintain so if wage growth slows, we could see a deeper correction in GBP/USD. Bank of England Governor Mark Carney along with monetary policy committee members Broadbent, Haldane and Tenreyro will also be testifying on the Inflation Report before the Parliament’s Treasury Committee so expect some market moving comments. The labor data will determine whether GBP/USD recaptures 1.40 or gets resisted at it.
As for the euro, today we have German Manufacturing and EUR PMI’s which if fall short of expectations and the dollar rallies on the back of the FOMC minutes, EUR/USD could drop as low as 1.22. Consumer confidence also took a hit according to the Eurozone’s latest report. How EUR/USD responds will be dictated by the degree of weakness. If the data only misses slightly, investors may chalk it up to a pullback after a series of strong months. If there are steep declines, EUR/USD will sink to 1.23 with risk of dropping to 1.22 if the FOMC minutes take the dollar higher.
The major commodity currencies USDCAD, NZDUSD, and AUDUSD traded sharply lower against the greenback this week. The Canadian dollar was hit the hardest as the surprise decline in wholesale sales points to a weaker retail sales report on Thursday. USD/CAD has now broken above the 100-day SMA, which means the rally could extend as high as 1.27. The New Zealand dollar was driven lower by dairy prices but the main focus will be on the RBNZ Governor’s speech before the finance and expenditure committees this evening. NZD/USD could extend its decline down to .7275. if there are no market moving comments or during his speech. The Australian dollar hit a 4 day low, paving the way for a deeper decline towards 0.78 level. The minutes from the last RBA meeting did not have a significant impact on the currency. While the central bank only sees inflation rising gradually, they also felt that domestically and globally, data has moved in a generally positive direction which isn’t significant enough for them.