us dollar strengthening once more as focus remains on the data this week

Weekly Outlook

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26th May 2015 by Richard Perry, Market Analyst

Macro Commentary

Are we set for another improvement in the dollar? There continue to be market reactions to the negative surprises, but

there now seems to be a different mind-set to positive data surprises and this is showing in a turn around in sentiment

on the greenback. Last week there was a sharp pick up in the Home Starts and Building permits which drove dollar

strength, but the real show of intent by the dollar bulls has been driven by a pick up in core CPI. Although the recent Fed

minutes were fairly dovish still and all but confirmed that a June rate hike is all but off the table now, Janet Yellen said in

a speech on Friday, "If the economy continues to improve as I expect, I think it will be appropriate at some point this year

to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” Yellen

believes weak recent data is transitory, whilst the Fed is looking for sustained labor market improvement, and a sign that

inflation is moving towards the 2.0% target. The dollar is strengthening, but watch for any negative data surprises

creating further volatility but also opportunities. With Q2 GDP on a run rate of less than 1% the US economic recovery is

hardly flying, but still the march towards Fed tightening looks increasingly between September and December this year.

WHEN: Tue, 26th May, 1500BST

LAST: 95.2

FORECAST: 95.0

Impact: The US consumer has had a poor few

months, as Retail Sales have consistently fallen

and Durable Goods Orders (ex transport) down in

6 months out of 7. A first reading of the Michigan

sentiment indicator fell sharply a couple of weeks

ago and April CB Consumer Confidence hit a four

month low. With consumption making up around

70% of the US economic activity this is not ideal

conditions for the Fed to hike rates and the hawks

will struggle if confidence is falling. Expectation is

for a slight dip, but this could be a volatile

reaction. Stronger confidence would be dollar and

equities bullish.

Must watch for: US Consumer Confidence

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 26th May 13:30 US Durable Goods Orders (ex transport) +0.4% -0.2%

Tue 26th May 15:00 US Consumer Confidence 95.0 95.2

Tue 26th May 15:00 US New Home Sales 520,000 480,000

Wed 27th May 15:00 Canada BoC monetary policy 0.75% 0.75%

Thu 28th May 09:30 UK GDP (Q1 – 2nd reading) 0.4% 0.4%

Thu 28th May 15:00 US Pending Home Sales +1.0% +1.1%

Fri 29th May 00:30 Japan CPI (YoY) 0.2% 2.2%

Fri 29th May 13:30 Canada GDP (Q1) +0.2% +0.6%

Fri 29th May 13:30 US GDP (Q1 – Prelim) -0.8% +0.2%

Fri 29th May 15:00 US University of Michigan Sentiment (final) 93.3 95.9

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1

US Consumer Confidence

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

Weekly Outlook 26th May 2015

by Richard Perry, Market Analyst

Foreign Exchange

The dollar bull run has been broken in recent weeks as the US economic data has consistently disappointed (with the

exception of the employment data). However, we saw signs last week of finally seeing some positive surprises which

have looked to drive a stronger dollar once more. The announcement of key consumer data, such as the durable goods

and consumer confidence, both of which have disappointed in recent months could have a strong impact on the dollar if

they show any sort of positive surprise. After the pick up in core inflation this could begin to drive talk of an earlier rate

high once more. Although one swallow does not make a summer, US data has been so poor in recent weeks that any sign

of improvements are having a significant impact. The Dollar Index has now rallied over 3% in just a week and a half, to

complete a three week base pattern and breach the key resistance at 96.17. Any further positive US data surprises this

week will only continue to drive the gains.

WATCH FOR: Tuesday’s batch of US data will drive the dollar early in the week. The Canadian Loonie could

also have some action this week with both the BoC monetary policy and GDP to drive expectations. Also

watch out for the second reading of both UK and US GDP growth figures.

EUR/USD

Watch for: Use any correction to buy for

pressure on resistance $1.1450/$1.1530

Outlook: A massive turnaround in sentiment

on Friday afternoon in the wake of the US

inflation data has confirmed the

deterioration in the outlook for the euro.

The breakdown below the first key reaction

low at $1.1130 has therefore been followed

by a break below the key support at $1.1065.

With the sell signal on the MACD lines, RSI

and Stochastics also deteriorating the

prospect of further retracement towards the

next pivot level at $1.0800 is high this week.

$1.1065 is now resistance.

GBP/USD

Watch for: A breakdown of key near term

support at $1.5445 opens the downside

Outlook: The bullish outlook has taken some

punishment after a huge turnaround in

sentiment came through on Friday on the

back of the US CPI data surprise. The

uptrend is under pressure and the

momentum indicators are now turning into

more of a corrective configuration. A close

below the $1.5445 low would confirm the

sterling bulls have lost control this week.

Subsequent supports come in at $1.5400 and

then $1.5300. Key resistance is in at $1.5500

to $1.5550 range now.


FX Outlook

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Indices

Although the S&P 500 has been drifting to all-time highs I remain sceptical. My concerns have grown since I saw a chart of

the recent divergence between the Dow Transports and the S&P 500. Dow Transports has been a great confirmation

indicator for equities in recent years, but the chart has recently broken to a new 8 month low. With the impact of the

stronger dollar hitting US corporates, US economic growth struggling and equity valuations at extreme levels, this leaves

me with serious misgivings over upside potential of the S&P 500. There is still a strongly negative correlation between the

DAX and the euro, suggesting that any euro weakness should help to support the DAX, at least relatively, whilst if the ECB

can front-load QE purchases in the coming months this should also be a positive for the DAX. The FTSE 100 continues to

be held back by lack of growth in the three main sectors which account for just under half the weighting. Banks (which

continue to have a tough time amidst a hostile regulatory environment), Mining (which is failing to gain any traction in a

recovery) and Oil & Gas (oil price rally has stumbled recently) are all behind why FTSE 100 lags its European counterparts

such as the DAX and CAC. However, FTSE 100 is also less aligned with currency/bond volatility and is more stable.

WATCH FOR: Eurozone equity markets (especially the DAX) are still being dragged around by movements

in the bond markets (especially the German Bund) and the euro. Wall Street sentiment also has links with

Treasuries yields still. Watch for US data driving the dollar and Treasuries and subsequently equities.

DAX Xetra

Watch for: The support band 11,620/11,710

needs to hold

Outlook: The improvement in the outlook

for the DAX has corresponded with a

negatively correlated deterioration n the

euro once more. An intraday turnaround on

Tuesday now needs to form support in the

band 11,620/11,710 to prevent a

deterioration again. For the bulls to be

considered back in control once more it

would need a push decisively above the key

resistance around 12,000 this week.

Momentum indicators are picking up.

FTSE 100

Watch for: A test of the resistance band

between 7084/7123

Outlook: The FTSE 100 has been gradually

pushing higher in the past week in a series

of gains that has seen the index drift

towards the key overhead resistance of the

rally high in the wake of the Conservative

victory in the UK election, at 7084. However,

with the index struggling to build on this,

the impetus is being lost. Neutral technical

indicators (RSI, MACD and Bollinger Bands

do not suggest an imminent breakout this

week though.


INDEX Outlook

3



Other Assets: Commodities & Bonds

Gold is once more being driven by the performance of the dollar. Renewed dollar strength in the near term (exacerbated

by a pick up in US inflation on Friday) has turned the outlook for precious metals around once more. Driven by better

than expected housing data and a pick up in inflation has driven dollar strength and weakness in metals prices. A

continuation of this move this week could continue with several consumer and housing releases. Oil prices broadly

remain rangebound as declining US crude stocks (suggesting falling supply) battle the renewed dollar strength.

A bull run in bond yields has become more of a consolidation in the last couple of weeks, with 10 year Treasuries settling

between 2.1% and 2.35%, whilst the German Bund yield has been trading between 0.52% and 0.80%. Rangebound yields

could now mean uncertain sentiment and choppy throughout markets that have been so fixated by the spike higher in

recent weeks. As talks over the release of the final bailout tranche rumble on unresolved Greek bond yields have picked

up slightly. The closer we get to the next €300m repayment (5th June) yields may begin to move higher.

WATCH FOR: Mixed US data is still driving dollar expectations so watch for Confidence and growth data

and the negative correlation with commodities, whilst being positive correlated with Treasury yields

Gold

Watch for: The range play continues

between $1178/$1225

Outlook: The closing levels suggest that

the range is between $1178 and $1225

and with momentum indicators also in

neutral configuration the bulls have been

unable to grasp the initiative again.

Despite the occasional intraday breach in

the past couple of months (both higher

and lower), the best strategy is to

continue to play the range until it is

breached decisively on a closing basis,

with momentum indicators confirming.

German 10 year Bund yield

Watch for: Key support at 0.520% remains

intact as the yield consolidates

Outlook: The huge spike higher in the Bund

yield has taken some respite for the past

week. This consolidation means that the

same key levels remain intact with the

support at 0.52% and resistance at 0.80%.

These will now be considered key lines

drawn in the sand for the outlook of the

German Bund. Momentum indicators are

unwinding the overstretched momentum,

however for the near term there are a

majority of negative candles building up. A

breach of initial support at 0.555% has

added to pressure on the key low at 0.520%.

This could be driven by the ECB’s attempts

to frontload QE purchases in coming weeks.


COMMODITIES & BONDS Outlook

4

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us dollar strengthening once more as focus remains on the data this week

Economy & Finance