30.05.2005
“Non”, the verdict is out and French voters have decisively rejected the EU constitution. It is now feared that the Dutch who go on vote this Wednesday might also follow suit. However, it would be wrong to presume that the idea of a unified Europe is rejected. In fact this is also implies, given the high turnout as well, that people are taking more interest in the Euro-Zone politics and this could make the zone’s elite decision makers in Brussels pay more attention to the common man’s opinion. It remains to be seen the extent of the repercussions of this result but there is no doubt that after a rousing start, more and more sections of the market would start asking the question, is the honeymoon over for the Euro?
The market has more or less priced in the result, as the Euro has slid steadily over the past few weeks. But the main reason why the Greenback is looking fit enough to run a marathon while the Euro is struggling to stand straight is the continuous stream of poor data from the zone. This is also the main factor behind the rejection of the EU constitution as the unemployment rate is around post WW2 record highs and the public has also expressed displeasure over local government policies. Thus voters have translated their dissatisfaction over President Chirac’s policies into the rejection of the EU constitution as the ‘Yes’ vote was strongly endorsed by President.
Most majors start the week on nearly the same levels as last week and some sections of the market are questioning the reason why the Dollar’s gains have not accelerated in spite of the continuous out performance of its fundamentals compared to the rest. The reason, for one is that the manufacturing sector in the U.S. is looking mixed with this week’s ISM Manufacturing and Factory orders eyed. Also the market is likely to wait and watch the Payrolls outcome to see if last month’s robust outcome can be maintained. Another factor is, since even the grocer down the road has been advocating a Dollar crash this year and many traders positioned themselves on the wide spread belief of the Euro climbing to 1.40. This immense shift in momentum, psychologically from a trading perspective takes some time to adjust.
Nonetheless the Dollar has its weaknesses as well with the Yuan revaluation looking highly likely this year while the interest rates peaking would see the deficit story back in the limelight. But for the Dollar to go back to its lows, sustained out performance of European fundamentals have to be seen, and this doesn’t look possible in the current scenario. The IMF in its latest report has stated that the outlook for the U.S. economy for the next two years is “broadly favorable”.
The Euro hasn’t broken decisively below the crucial 1.2460-1.25 region and the inability of the Dollar to push through might be taken by the market as a signal of a solid base to push the Euro back higher. Thus we are sitting at a crucial stage technically as well as from a fundamental point of view and the data outcomes have to be eyed closely for further direction.
Key Economic Releases
USA
| Day | GMT | Release | Previous | Forecast | Comment |
| Tuesday | 14:00 | May Chicago PMI | 65.6 | 62.0 | Expected to pull back as orders have declined with employment sub index eyed. |
| Wednesday | 14:00 | May ISM Manufacturing | 53.3 | 52.4 | Regional data suggests decline in the index |
| Thursday | 14:00 | April Factory Orders | 0.1% | 1.0% | Increase in export orders would lead to factory orders inching higher. |
| Friday | 12:30 | May Non Farm Payrolls | 274K | 190K | Expected to stay around 200 K confirming robust employment scene. |
| Friday | 14:00 | May ISM Non-Manufacturing | 61.7 | 60.0 | Services sector should continue to be around steady levels. |
Euro-Zone
| Tuesday | 06:45 | French May Consumer Confidence Indicator | -24 | -25 | Should continue to decline as employment remains low. |
| Tuesday | 07:55 | German May Unemployment Rate | 11.8% | 11.8% | Rate should continue to hover around record high levels as hiring fails to pick up. |
| Tuesday | 09:00 | May CPI y/y | 2.1% | 2.0% | It should stay within the ECB’s inflation target |
| Wednesday | 06:00 | German April Retail Sales | 0.0% | -0.4% | Spending remains stiffened and sales should slide. |
| Wednesday | 08:00 | May PMI Manufacturing | 49.2 | 49.0 | Orders have failed to pick up. |
| Wednesday | 09:00 | Q1 GDP | 0.2% | 0.5% | Should come in better than last quarter but overall outlook looks weak. |
| Thursday | 11:45 | June ECB Interest Rate Announcement | 2.00% | 2.00% | ECB has no intentions to raise rates this year and should remain on hold. |
| Friday | 08:00 | May PMI Services | 52.8 | 52.6 | Keeping in line with the trend should decline slightly across the zone. |
| Friday | 09:00 | April Retail Sales | 0.3% | -1.0% | Sales have been sluggish across the zone and should decline. |
Japan
| Monday | 23:30 | April Workers Household Spending | -1.7% | -3.7% | Mixed direction of the economy is stiffening spending. |
| Tuesday | 01:00 | May Manufacturing PMI | 53.3 | 53.5 | The sector has picking up on rise in export orders. |
| Wednesday | 23:50 | May Monetary Base y/y | 3.00% | 2.50% | Should continue to stay around recent levels. |
U.K.
| Tuesday | 10:00 | May GFK Consumer Confidence survey | 0 | -1 | Consumer Confidence should decline on recent sluggish economic conditions. |
| Wednesday | 08:30 | CIPS Manufacturing PMI | 49.5 | 49.9 | Should remain around recent levels but orders have declined. |
| Thursday | 10:00 | May Nationwide House Prices | 0.9% | 0.1% | House prices have stabilized a bit but not increasing. |
| Friday | 07:30 | May CIPS Services PMI | 56.5 | 56.8 | Services should remain largely unchanged but outlook is weak. |
Australia
| Tuesday | 01:30 | Q1 Current Account Balance | -15174Mn | -15200Mn | Deficit expected to widen |
| Tuesday | 01:30 | April Retail Sales | 0.1% | 0.3% | Spending remains around healthy levels. |
| Wednesday | 01:30 | Q1 GDP q/q | 0.1% | 0.8% | Robust employment conditions and healthy capex should increase GDP |
| Thursday | 01:30 | April Trade Balance | -2672Mn | -2100Mn | Import costs have declined as oil prices eased thus deficit to should pull back. |
| Friday | 00:30 | Q1 House Prices | 0.6% | 0.0% | House price trend is from stable to decline. |
Technical Scenario
EUR/USD – The pair has stabilized last week and continues to hover around the 1.25 mark with decent sized bids lying around that region. A break below could have broader repercussions and a massive shift in sentiment on its crosses as well. But bottom pickers and decent sized hedge fund bids lie up to the 1.2460 support mark with a break brining the 1.2355-70 support zone into focus. On the upside, 1.2590 is the first resistance mark followed by a stronger one around 1.2645 with any move above it leading to strong offers. Heavy data from the Zone is eyed for further direction.
USD/JPY – The pair is hurt by dual events of broad Greenback strength as well as the Yuan revaluation issue toning down but it continues to yo-yo between announcements on this issue. For now resistance exists in the 108.25-40 zone with strong resistance around 108.75 with a clear break above 109 which is a crucial mark could accelerate losses for the Yen but offers also exist in the 109 region which holds mixed interest. On the downside, Dollar bids are mild around 107.55 followed by strong resistance at 106.75.
GBP/USD – The pair has seen the biggest shift in sentiment against it as its biggest supporting factor i.e. prospect of high interest rates is looking very uncertain while the economy seems to be headed towards a sluggish state Like the Euro bottom picker are keeping it around 1.82 with mild support around 1.8175 followed by the support zone at 1.8125-40. On the upside mild resistance lies around 1.8290 followed by strong offers on any break above 1.8355.
AUD/USD – The pair is taking cue from other majors as the heavy data week from Australia will give further clues. The support zone around 0.7525-40 has held well so far but a break below 0.75 could lead to the acceleration in losses with 0.7440-55 the only strong support zone till 0.72. On the upside, resistance lies around 0.7640-55 with very strong resistance and offers on a break above 0.77.
Kunal Sharma
Forex Analyst
E-mail: kunal@easy-forex.com
Australian Financial Services License 246566
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