2 Big Days for Eurozone Data
Key economic reports from the Eurozone and UK over the next two days will be critical to the near-term price action in the euro and British pound, both of which are now confined in tight ranges versus the dollar.
While the euro (EUR) ended Monday lower against the US dollar (USD), the fact that EURUSD continues to hover near the 1.33 level is encouraging. The potential need for another aid package for Greece did not lead to a significant euro selloff.
No economic reports were released from Germany on Monday, but France had a narrower current account deficit, which is consistent with the gradual improvements experienced in the Eurozone's largest economy. Elsewhere, both Estonia and Greece reported stronger GDP numbers, which is an encouraging sign of life in the Eurozone periphery.
Final German consumer prices are scheduled for release on Tuesday, and an uptick in price pressures will be confirmed for the month of July. Given the recent trend of European data, we believe that despite the significance of the releases from both sides of Atlantic this week, EURUSD should trade between 1.3100 and 1.3450, which means we expect recent ranges to remain intact as investors weigh the growth outlook in Europe with the prospects for Fed tapering.
See also: 2 Rock-Solid Ranges for EUR/USD, GBP/USD
For the Eurozone, the German ZEW survey on Tuesday and second-quarter GDP numbers on Wednesday are key. There has been a general trend of improvements in the German manufacturing sector that should lift investor confidence, but the sharp decline in retail sales in Q2 may have dampened growth in the quarter. If German GDP fails to live up to market expectations, EURUSD could slide to the bottom of this range.
Top-Tier UK Data on Tap This Week
The British pound (GBP) continued to reject the 1.56 level by extending its losses against the greenback. This is a busy week for the pound, and while no UK data was released overnight, the economic calendar will heat up starting with Tuesday’s inflation reports.
Consumer price growth is expected to stagnate in July after falling 0.2% in June. CPI is still running well above the Bank of England’s (BoE) 2% inflation target, but it is slowly declining. In addition to the inflation target, the central bank recently introduced an unemployment rate threshold this month, giving investors two key data points to monitor and gauge when the central bank will be ready to alter monetary policy.
The 1.56 level has been a significant inflection point for GBPUSD, and this week's top-tier UK economic reports will play a big role in whether this level is broken.
Data is due out on Tuesday, but Wednesday is the big day for sterling. Aside from the UK employment report, the Bank of England meeting minutes are also scheduled for release. The central bank left monetary policy unchanged, but the main question is how many monetary policy committee members, if any, voted in favor of more asset purchases, and how many members voted for the new unemployment rate threshold.
If we learn that some members voted for additional asset purchases and the decision for an unemployment rate threshold was unanimous, GBPUSD could experience additional losses. However, if no one favored more quantitative easing (QE) and some members opposed the threshold—which was the BoE's attempt to stress its plans to keep monetary policy very easy for a very long time—GBPUSD could break above 1.56.
Insider’s Look at Australia’s Economy Due Tonight
The Australian (AUD), New Zealand (NZD), and Canadian dollar (CAD) all sold off against the greenback on Monday, giving up a small part of last week's gains. No economic data was released from any of the three commodity-producing countries, and the currencies failed to benefit from the rise in gold prices, leaving US dollar strength and Fed tapering as the primary catalysts for the move lower.
This is a quiet week in general for the three countries, but according to the latest CFTC IMM data released on Friday, speculative AUDUSD short positions remain near record highs. Since this data measures positioning as of last Tuesday, we suspect there are fewer short positions now with the currency pair up nearly 400 pips from its lows.
While a move to its seven-week range high of 0.9345 is possible, in order for more AUDUSD shorts to be shaken out, we need a significantly weaker US retail sales report to drive the dollar lower since there is very little market-moving Australian data on the calendar.
Overnight, Australia's Treasury and Finance departments will release the pre-election economic and fiscal outlook, an independent assessment of the current budget and economic conditions. Politicians hinge their spending promises on the amount of revenue expected in the coming years. While the forecasts often miss their mark, they are nonetheless an interesting look at how the government views the economic outlook.
Meanwhile, the New Zealand dollar was hit by a decline in house prices and slower increase in food prices. Australian business confidence is the only piece of data scheduled for release over the next 24 hours.
Japan May Dodge Controversial Consumption Tax
The Japanese yen (JPY) ended Monday lower against most major currencies, but its losses were modest because the details of last night's Japanese GDP report showed that growth wasn't nearly as weak as the headline number. In the second quarter, Japanese GDP growth slowed to 0.6% from 0.9%, which on an annualized basis left GDP growth at 2.6% vs. 3.8% in Q1.
The drag came primarily from inventories, but capital expenditures and public investment was also weak, although the impact on the yen was limited because consumer spending and export growth remained solid. In Q2, consumer consumption rose 0.8%, leaving the year-over-year increase in private consumption at 3.1% last quarter vs. 3.4% in Q1.
In all, this is a sign that Abenomics is working, albeit slower than anticipated, and Japan remains on track for a continued recovery in the second half of the year.
The second-quarter GDP report is important because it is based on data that Abe's administration will use to decide whether the economy can handle a consumption tax. At this stage, it is a tough call, especially because the tax is controversial to begin with and the opposition will probably grow louder given the slowdown in growth. However, as long as the economy continues to improve in the coming months, the Abe administration should push for an approval of the tax in October.
Meanwhile, it is also worth mentioning that the CGPI index increased in July and industrial production numbers were revised higher, both of which are positive developments for the yen.
Overnight, the Bank of Japan (BoJ) will be releasing the minutes from its July monetary policy meeting. The central bank refrained from easing monetary policy but upgraded the economic assessment, which suggests the potential for a slightly more optimistic tone.
By Kathy Lien of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.