USD could be poised for prolonged bear market
The weaker than expected US jobs numbers -- should they prove to be the beginning of a new trend -- may well mark the start of a sustained bear market for USD as it would spell the end of monetary tightening.
The USD index (a basket of currencies versus USD) has already slid considerably from just over a 100 at the end of November 2015 to hit a low of 91.5 this month. Though it has rebounded to levels of just under 94, USD is in danger of breaking through a major consolidation pattern built up since January last year. A decisive break below 92 could see USD unwind its big rally started around April 2014 and fall to levels possibly as low as 80-84.
A USD bear market depends to a large extent on whether the US interest rate cycle has peaked. The market is increasingly thinking it has, but the US Federal Reserve still holds out hopes for one or two more rate rises. Should the Fed’s view align further to that of the market’s, then there’s certainly a weaker case to be bullish on USD.
By most economic measures the US economy doesn’t look like it needs higher interest rates as it is hardly firing on all cylinders. Corporate profits are under pressures, manufacturing is struggling and Q1 GDP was only +0.5% on an annualised basis (1.4% in Q4) – the weakest in two years, though Q2 may show some pick-up if past trends are anything to go by. Also, inflationary pressures appear largely contained.
April Non-Farm Payrolls number, which came in at 160,000 (and previous months were revised down), below the expected 200,000, though far from a disaster, is below trend. It could be a one-off, but it might show that the slowdown in other sectors of the economy is starting to hit jobs.
Nonetheless, the Fed could still see a case for a rate rise. Pay rises are running at 2.5%, according to NFP numbers, again hardly spectacular, but it does appear to be part of a trend of gradually rising wages. The other number, which could convince the Fed that the US economy is only suffering a temporary malaise is that Q1 consumer spending was +1.9%, not a great number, but it does suggest that GDP could be a little quicker in coming quarters.
If the economic and jobs numbers continue to be tepid it seems likely that the Fed will veer towards being cautious next month and leave interest rates on hold. Meanwhile, numbers out on Friday, which include US core retail sales and preliminary UoM consumer sentiment, should help shed further light on the US economy.
However, if the US has entered a phase of much more sluggish growth, it seems very likely that the US interest cycle has peaked. Central banks such as the one in the Eurozone and Japan, may well respond with even more extreme monetary policies as they struggle to keep alive the monetary divergence story between themselves and the US.
TECHNICAL ANALYSIS: EUR/USD – long-term uptrend still intact
Despite the best efforts of the European Central Bank, EUR/USD continues to make steady upward progress – a trend that started in early December last year. There isn’t much to suggest that it has decisively changed, if anything it is likely to resume once the current bout of weakness has played out.
Early last week, EUR/USD punched through the upper Bollinger band and has predictably pulled back. It’s possible the pair could fall a bit further or even consolidate around current levels before making further upside attempts. Meanwhile, the daily slow stochastics has issued a strong sell signal.
Support can be seen at 1.1360, but a more decisive area would be 1.1217 and 1.1164 below that. Baring a major news event, 1.1217 should hold. Resistance can be seen around 1.1486, 1.1533 and the recent high of 1.1617. A move above 1.1500 can be seen as the market potentially building up for another upward attempt. The problem with any attempt above 1.1600 is that the ECB is likely to start doing its best to rein in the EUR.
By Justin Pugsley, Markets Analyst, MahiFX