Squaring Circles is Not Childs Play

The markedly stronger than expected latest US retail sales data released on Friday afternoon certainly gave the dollar a boost. The EURUSD dropped through support around 1.1240-50 as the USD index lifted through technical resistance at 97.20 to reach as high as 97.58 before drifting back a little into the weekly close.

The stronger dollar also led to a sharp sell-off in gold. Now in my morning update on Friday I mentioned the importance of that $1358.50 level that I highlighted on a chart. Well, perhaps unsurprisingly, this level pretty much got nailed on Friday morning with the high set at 1358.25 ahead of the US retail sales data.

Well, the combination of a higher dollar and generally benign weekly closes for US equity markets ensured that level was in fact the top of the shop on Friday.  Indeed, the price is lower this morning, trading back below $1340 as the dollar retainspretty much all of its gains from last week ahead of the European reopening this morning.

The stronger dollar on Friday didn’t do the pound any favours either. The GBPUSD fell through support around 1.2600-10, later closing the week at 1.2589. Indeed, its not any higher either this morning, as I write and an important trend line support level looms close by now which I will show you via a longer term 5year chart below.

The red trend line I have drawn on this chart comes in now at approximately 1.2560- a point that also defines the interim low set on 31/5 when the price touched 1.2559. So clearly this is a level to watch very closely now and if nothing else I would expect some selling pressure to emerge from stop losses if the level is breached this time.  

Irrespective of the lower GBPUSD, the fact that the EURUSD is back closer to 1.12 this morning is helping to keep the downside on the GBPEUR in check. However, and as I noted last week, the topside on this one looks very limited still and 1.1111 remains very much in the crosshairs on this pair. Just for your guide 1.1111 equates to 0.9000 EURGBP.

Data event wise this week we have some important monetary policy decisions to take note of. The highlight of those being from the US Federal Reserve on Wednesday evening. No change is expected from the Fed this week, but the markets are certainly focused in on any clues that the FOMC will bow to market, and presidential pressure, and lower rates at the end of July.

Personally, I have my doubts about that, but I am certainly live to the possibility. I suppose Powell has a lot to consider here, not least continued condemnation from his employer, as well as domestic and global concerns surrounding the growth outlook.  

Elsewhere, I think its pretty safe to assume that the Bank of England and Bank of Japan will do nothing on Thursday despite the Old Lady, and Carney in particular, continuing to prime the markets for a rate increase.

Meantime India is the latest country to lose its most ‘favoured nation’ status with Uncle Sam. No prizes for guessing who might have had some sway in that decision then! Moreover, the US president was at it again on Friday, bemoaning almost any country whose currency is not strong versus the dollar, with fresh focus on Europe and China.

Unfortunately for Trump, and as far as Europe is concerned, the strong dollar is more a bi-product of something that he has little control over and shouting the US currency down is not ultimately going to change that unless it results in significant reserve re-allocation.

Whilst that in turn might have the impact of strengthening the EUR, it would surely also raise US inflation and consequently not square the trade/currency circle that Trump is seeking. Furthermore, it would be ‘wise’ to recognize that tariffs themselves are inflationary. Perhaps a ‘simple’ message for the US commander in chief that might help him better understand that there are numerous circles out there- far more than he sees, and just how many ‘subtle’ considerations are required when setting monetary policy at the FOMC.

Important Economic Releases Due Later This Week

18/06- 10.00am May Eurozone CPI- Final Reading

18/08- 10.00am German and EU May ZEW Index

19/06- 9.30am UK June CPI, RPI and PPI Inflation reports

19/06- 1.30pm Canada May CPI inflation report

19/06- 7.00pm US FOMC Policy Decision

            (No changes Expected)

20/06- 5.00am Bank of Japan Policy Decision

            (No Changes Expected)

20/06- UK Bank of England Policy Decision

            (No Changes Expected)

20/06- 3.00pm US May Leading Index

21/06- 1.30pm Canada April Retail Sales

21/06- 2.45pm US June Manufacturing and Services PMI