dollar correction running out of steam ahead of crucial tier 1 us data this week

Weekly Outlook

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30th March 2015 by Richard Perry, Market Analyst

Macro Commentary

The Federal Open Market Committee (FOMC) will keep a very close eye on the economic data this week as there are

three key releases that that could drive monetary policy which is sure to ramp up volatility. Personal Consumption

Expenditure (PCE) is the Fed’s preferred measure on inflation; the ISM Manufacturing PMI is a forward looking indicator

for growth; and Non-farm Payrolls (i.e. unemployment) could all be key. FOMC member Lockhart suggests that a June

rate hike could still be on the table but this would need a significant pick up in the PCE and also the ISM data arresting a 4

month decline, however a continued decline is forecast. In my opinion the Fed is still unlikely to hike rates until Q4 (as I

have been saying for a while). The GDP run rate continues to decline (the final Q4 2014 GDP missed estimates too), whilst

estimates of a 3% fall in S&P 500 corporate earnings in Q1 is also a tell tale sign. The fact is that the strong employment

data is not feeding through to growth due to the sluggish growth in productivity which is running at around 0.5% (versus

an average of c. 2.0%). A lack of wage growth is also a sign and we will get more of an idea this week. Volatility has been a

feature of these forex markets throughout Q1 and there is no suggestion of this letting up any time soon.

WHEN: Fri, 3rd Apr, 1330GMT

LAST: +295,000

FORECAST: +244,000

Impact: Non-farm Payrolls have caused a stir in

recent months, with the 295,000 jobs added in

February helping to drive expectations that the

Fed might hike as early as June. Janet Yellen has

tried her hardest to pour cold water on that, but

with “patient” removed from the FOMC statement

consistently strong payrolls will be sending a big

message. Consensus of 244,000 would be 13

months in a row above 200,000. However, average

hourly earnings remain anchored around 2.0% and

a +0.2% month on month expectation suggest no

pick up again.

Must watch for: Non-farm Payrolls

Key Economic Releases

Date Time Country Indicator Consensus Last

Mon 30th Mar 13:30 US Core Personal Consumption Expenditure (YoY) +1.3%

Tue 31st Mar 09:30 UK GDP (final Q4 2014) +0.5% +0.5%

Tue 31st Mar 10:00 Eurozone Flash CPI -0.1% -0.3%

Wed 1st Apr 02:00 China Manufacturing PMI 49.7 49.9

Wed 1st Apr 09:00 Eurozone Manufacturing PMI 51.9 51.0

Wed 1st Apr 12:30 UK Manufacturing PMI 54.3 54.1

Wed 1st Apr 13:15 US ADP Employment Report 225,000 212,000

Wed 1st Apr 15:00 US ISM Manufacturing PMI 52.5 52.9

Fri 3rd Apr 13:30 US Non-farm Payrolls 244,000 295,000

Fri 3rd Apr 13:30 US Average Hourly Earnings (MoM) +0.2% +0.1%

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Non-farm Payrolls

N.B. Please note all times are British Summer Time (GMT+1), data source Reuters

Weekly Outlook 30th March 2015

by Richard Perry, Market Analyst

Foreign Exchange

There has been considerable volatility on forex markets ever since the latest FOMC meeting. However, with markets now

driving on data dependency this week promises to be even more volatile as a whole raft of key economic data hit the

wires. Any strong US data (especially tier 1) is driving positive dollar flows on the expectation that now the Fed has

removed “patient” from the FOMC statement it could drive a potential rate hike. The broad correction that the dollar has

seen since 18th March has now entered a choppy phase as in addition to the data releases you can now add in the

comments of Fed members to add to the volatility. Following on from the hawkish comments of supposedly dovish

FOMC member Dennis Lockhart, traders will now be keeping a keen eye on any rhetoric that could hint at potential shifts

in monetary policy. The reason this is key is because markets are fixated on how the dollar is performing. Rallies on the

euro, Aussie and Kiwi are all now reversing as there have been hints at a potential return of the dollar bulls. This week

with so much tier 1 economic data out of the US the volatility on major pairs will surely be elevated.

WATCH FOR: The key US data will again be the focus this week and continue to drive sentiment on the

dollar. This will include Personal Consumption Expenditure, ISM Manufacturing and of course Non-farm

Payrolls. Flash Eurozone inflation and the manufacturing PMIs will impact the euro.

EUR/USD

Watch for: A battle for control as the euro

recovery begins to slip

Outlook: The daily chart shows that last

week was fairly choppy for the euro which

has resulted in momentum indicators tailing

off and a loss of impetus in the recovery.

Coming into such an important week of data

this leaves a battle for control which could

see significant volatility. There is now

support band sitting between $1.0765

/$1.0800 with resistance at $1.1050, with

near term indicators suggesting more of a

range bound outlook. This outlook is likely to

be tested though, but direction on EUR/USD

is key for so many markets now.

GBP/USD

Watch for: Rangebound trading to continue

Outlook: Unlike the euro, Cable has not

been in recovery mode, settling more into a

range phase in the past week, with support

around $1.4800 and resistance at $1.5000.

Near term momentum indicators continue

to suggest that selling into strength remains

the most viable strategy and pressure on

$1.4800 can be expected this week. As we

move closer to the UK election too it is likely

that with such political uncertainty from any

number of potential outcomes, this will act

as a drain on sterling, but also drive

volatility. Strong US data this week would

also pressure support.


FX Outlook

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Indices

Traders are looking forward towards the earnings season for Q1 results and it would appear that the read through from

the strong dollar is not going to be positive for profit growth of the S&P 500, which according to Deutsche Bank drives

around a third of sales from abroad and around 40% of profits. This could be set to drive a decline in Q1 profits, with

Reuters forecasting around 3% decline in earnings for the S&P 500. There is a positive correlation between corporate

earnings growth and GDP, which would suggest that US growth is struggling in Q1. Amid the backdrop of a market that is

expecting the Fed to begin tightening at some stage in 2015, this is not a positive set up for US equity markets. The S&P

500 continues to trade in negative correlation with the performance of the US dollar. This is also the same with the FTSE

100 which not only tends to take its lead from Wall Street, but the 28% weighting in basic materials and oil majors leaves

is exposed to the performance of commodity prices (again a negative correlation with the dollar). The DAX is a different

story, with a high weighting towards exporters, the DAX runs off a negative correlation with the euro. This leaves traders

in a curious position that EUR/USD strength is positive for S&P & FTSE, whilst being negative for the DAX.

WATCH FOR: a big week of data that will drive the dollar and subsequently the performance of major

markets. Good news may be turning bad for Wall Street and focus on the Personal Consumption

Expenditure, ISM Manufacturing and Non-farm Payrolls will all be crucial for markets.

DAX Xetra

Watch for: The broken uptrend suggests an

uncertain near term outlook for the bull run

Outlook: The uptrend since the turn of the

year has been broken to suggest the bulls

have lost an element of control despite

today’s strong open. Momentum has tailed

off slightly and the prospect of profit taking

could hold back an advance back towards

the highs at 12,220 this week, making the

reaction high at 12,088 a key near term level

the bulls would need to break and then

hold. The support band 11,400/11,600 is the

first stop for a correction.

FTSE 100

Watch for: Support forming in the band

6700/6800

Outlook: Despite breaking into new high

ground and pushing above 7000 for the first

time, it seems to constantly be a case of two

steps forward and one step back. The FTSE

100 still cannot shake of this outlook that it

remains rangebound. Technical indicators

suggest this week could be choppy. There is

a band of support c. 6700/6800 which the

bulls will be eying as a floor. A supportive oil

price would help, as would a continuation of

the dollar correction. Ultimately these

corrections continue to be bought into, but

the closer we get to the UK General Election

the higher the volatility will be.


INDEX Outlook

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Other Assets: Commodities & Bonds

The significant rally in commodity prices on the back of a weaker dollar may be rolling over amid signs that the dollar

may be finding support again. This could now feed through to a slide in precious metal prices, with gold back below

$1200 with silver backing away from $17.50 again. The oil price is moving on geopolitical tensions in Yemen with

concerns over the impact on a supply route through the Red Sea and also discussions over Iran’s nuclear program.

Eurozone bond yields may have begun to stabilise, but the same cannot be said for yields of Treasuries and Gilts which

continue to move around on expectations of US and UK interest rate hikes. The hawkish comments from a historically

dovish FOMC member Lockhart have caused a spike in Treasury yields. This would suggest traders will now be highly

focused on Fed member comments that could drive expectations of a rate hike. A similar move was also seen on Gilts as

the Bank of England governor Carney effectively ruled out any further loosening of monetary policy (which could have

still been o the cards with inflation falling recently to zero. Again in the UK central banker comments will drive yields.

WATCH FOR: US data is crucial as it will drive the dollar and impact on bonds and commodities. Personal

Consumption Expenditure, Consumer Confidence, ISM Manufacturing and Non-farm Payrolls are key.

Gold

Watch for: The old support around $1192

becoming a new pivot level

Outlook: Dollar weakness and rising

geopolitical tensions in Yemen have

driven gold higher, but consolidation on

Friday have meant near term question

marks over the recovery. There is now a

near term pivot level forming around old

support at $1191 which is now a gauge of

near term sentiment. Momentum is just

rolling over now so this suggests this week

could be vital to the medium term gold

bulls. Below $1191 pens $1175/$1180.

Above $1220 reignites the bulls.

Brent Crude oil

Watch for: Support band $56/$57.80 is key

for the recovery this week

Outlook: The Brent Crude price shot higher

last week as the Saudi Arabia bombing in

Yemen started hitting the newswires. This

was merely a continuation of the recovery

move seen on Brent since the FOMC

meeting. There has been an uptrend form in

the past 8 days, which today comes in

around $56. This support at $56 also marks

the bottom of a key near term band of

support up towards $57.80. For now

momentum remains positive and the bulls

will be eying $57.80 as a level that provides

a decent entry level.


COMMODITIES & BONDS Outlook

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dollar correction running out of steam ahead of crucial tier 1 us data this week

Economy & Finance