Decidedly poor economic data and an impending ECB rate cut hasn’t sunk the euro, as political news from Italy and already-priced-in expectations for a rate cut keep EURUSD trading above 1.30.
The euro (EUR) refuses to fall despite growing evidence that the Eurozone economy is in trouble. According to the latest economic reports, consumer spending and consumer confidence weakened further in the month of April, and this time, the deterioration was led by weakness in France and Italy. Data showed that demand in the Eurozone's second- and third-largest economies continued to be hit by slower growth and punishing austerity measures.
Even Germany saw a slight reduction in retail sales in April, and this pullback in demand across the region has resulted in either weak job creation or job losses for the retail sector. It should be no surprise, therefore, that economic confidence also declined last month, and there's a good chance that Tuesday’s German retail sales and unemployment numbers will also surprise to the downside.
For the European Central Bank (ECB), the case for a rate cut this week is building quickly. We have now seen evidence of weaker consumer, business, and investor confidence, and if the central bank does not act now, they risk allowing the sour mood to slow growth even further.
Even with a rate cut looming, many traders may be wondering why the euro refuses to fall. On Monday, the EURUSD was supported by the news that a new government is being formed in Italy, but the euro's resilience also reflects skepticism about how much of an impact a rate cut would actually have on the Eurozone's economy.
See also: Why an ECB Rate Cut May Not Work
Simply put, investors already expect the ECB to ease, so if they do not follow up with a bolder commitment, EURUSD traders could be disappointed, and the pair could continue trading above 1.30.
Pre-NFP, One Big US Report to Watch
The US dollar (USD) weakened against all major currencies following worse-than-expected economic data. Personal income growth slowed from 1.1% to 0.2% in the month of March, while personal spending growth slowed to 0.2% from 0.7%. Pending home sales increased 1.5%, but any enthusiasm from the rise was offset by a large downward revision to the prior month's report.
For the Federal Reserve, which meets later this week, today's economic data confirms that the US recovery lost momentum at the end of the first quarter. However, without seeing this week's ISM numbers or the all-important non-farm payrolls (NFP) report, the Fed won't rush to any judgments.
We do not expect any major changes to the central bank's monetary-policy stance this week, but the upcoming ISM and NFP reports will go a long way in shaping the market's expectations for Fed policy in the months to come.
See also: The 4 Biggest FX Events This Week
Meanwhile, over the next 24 hours, the S&P Case-Shiller house price index, Chicago PMI, and consumer confidence data are all scheduled for release. While stocks held onto their gains in April, the labor market weakened, and therefore, it will be interesting to see if the Conference Board reports an improvement or deterioration in sentiment.
British Pound (GBP) Still Facing 1.56 Resistance
While the British pound (GBP) also traded higher against the greenback, the currency pair ended the day much closer to its intraday low than high.
The Lloyds Business Barometer index and Hometrack Housing Survey—two third-tier economic reports—were the only pieces of UK data on the economic calendar. According to these reports, business grew more optimistic in the month of March and housing transactions increased.
More specifically, the London property research company said that the market in London was particularly strong, with homes staying on the market for an average of 4.6 weeks, the shortest duration since October 2007.
These better-than-expected numbers helped the GBPUSD sustain its gains, but the real test will be the PMI reports, which will provide the market a better look at whether the stronger growth enjoyed in the first quarter extended into April.
Consumer confidence numbers were due for release Monday evening along with net consumer credit, net lending, and mortgage approvals. The 1.56 level should remain resistance in the GBPUSD.
NZD - Lifted by More Spending on Christchurch Rebuilding Efforts
Monday’s best-performing currencies were the New Zealand dollar (NZD) and Australian dollar (AUD), which rose by 1% and 0.7% against the US dollar, respectively. No economic reports were released from either country, but the rise in commodity prices and the rally in stocks helped to boost demand for higher interest rate and/or higher beta currencies.
While NZDUSD appears poised for a test of its 1.5-year high of 0.8676, the AUDUSD has stiff resistance at 1.04. The rally in the NZDUSD was helped by Prime Minister John Key, who announced that the rebuilding of Christchurch after the February 2011 earthquake will cost another $10 billion more than initially anticipated. "This is the largest and most complex single economic project in New Zealand's history," Key said on Sunday.
This is good news for New Zealand because it means more public spending and more money pumped into the economy. Building permits and business confidence were scheduled for release on Monday evening, and stronger numbers could extend the rally. Australian private sector credit is not expected to have a significant impact on the AUDUSD.
Meanwhile, the Canadian dollar (CAD) also extended its recent gains thanks to the rise in oil prices. February GDP numbers are due for release on Tuesday, and given a large increase in the country's trade deficit and smaller rise in retail sales, we believe there's room for a downside surprise that could sap the rally in the CAD.
Low-Volume Trading Keeps USD/JPY Grounded
It is Golden Week in Japan, which means lower participation and volatility during the Asian trading session. The markets were closed Sunday night, but that did not stop USDJPY and other yen crosses from falling quickly at the open of the Asian trading session.
Australian and other Asia-Pacific traders who were online saw USDJPY fall sharply on Friday, and they took the currency pair even lower Sunday evening. Since then, however, the rise in US stocks and overall improvement in risk appetite helped most of the yen crosses recover to end the day in positive territory.
The markets in Japan re-open on Monday night, and a number of economic reports were scheduled for release, including PMI manufacturing, the jobless rate, industrial production, and retail sales. Nearly all of these reports were expected to show improvement in Japan's economy, as the weakness of the yen and monetary stimulus continue to provide support for growth.
While we have a very busy economic calendar this week, we don't think there's enough catalyst or participation in the Asian FX market to drive USDJPY above 100 unless there is a blowout US non-farm payrolls report on Friday. Even then, however, we are doubtful that it will be enough to take the currency pair above this key resistance level.
By Kathy Lien of BK Asset Management