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US recovery on track and set to boost USD strength

22 April, 2014

While the market initially experienced a slow start to the week with holidays in much of Europe and other western markets, optimism is growing in the US as company earnings season kicks off and a series of data announcements this week are expected to show an improvement in the health of the US economy. New home sales on Wednesday are forecast to increase from 440,000 last month to 450,000 and the improving US macroeconomic data is spurring a trend to buy USD. Assuming the recovery continues at this pace, the Federal Reserve’s asset purchasing program is on track to end in October and this could support long-term USD strength.

The USD kicked off the week by strengthening against the Japanese yen with USD/JPY trading at 102.73 on Monday. The yen weakness was due to Japan announcing a widening of the trade deficit to ¥1.45 trillion in March, much higher than the forecast of ¥1.27 trillion. This announcement further heaps concerns on the Bank of Japan to boost stimulus measures as the recovery in Japan drags far behind the other major world economies. Japan’s Core Consumer Price Index (CPI) data is due to be released later this week and the market will be closely watching to see whether the new sales tax has had any impact on the figures, although next month’s reading is expected to give a more realistic picture of the impact. The USD/JPY pivot point is 102.53, with resistance levels at 102.58, 102.61 and 102.66; and support levels at 102.50, 102.45 and 102.42.

The continuing conflict between Russia and the Ukraine is causing concern within Eurozone economies, particularly Germany with Russia one of the nation’s most influential trading partners. We are yet to fully realise what impact the sanctions imposed by the West have had on the Eurozone’s health, but should Putin decide to retaliate with his own sanctions, Germany in particular could be at a substantial economic disadvantage. German manufacturing data will be released on Wednesday which is due to show a small increase to 54.0, up from 53.7, and Eurozone manufacturing expected to remain the same at 53.0. Should this data vary substantially from what is forecast, the EUR pairs could experience volatility. The EUR/USD pivot point is 1.3806, with resistance at 1.3812. 1.3817 and 1.3823; and support at 1.3801, 1.3795 and 1.3790.

On Wednesday, the minutes from the last Bank of England’s Monetary Policy Committee meeting are due to be published and, although it is expected that all committee members voted together to keep rates unchanged, it will be interesting to see if there was some disagreement over forward policy. There are suggestions of hawkish tendencies of some members so it will be interesting to see whether this is evident from the minutes. Some GBP volatility is expected around this announcement and also when the latest UK retail sales figures are announced on Friday. While a dip in consumer spending is expected to be announced, the long term outlook for consumer spending is positive with wage growth last week announced to have finally overtaken inflation for the first time in several years. The GBP/USD pivot point is 1.6817, with resistance at 1.6832, 1.6839 and 1.6854; and support at 1.6810, 1.6795 and 1.6788.

A fairly quiet week is expected in Australia with only three working days due to public holidays. The main announcement of note is Wednesday’s Consumer Price Index which is expected to remain unchanged at 0.8%. Should the final figure differ from the forecast, AUD pairs could show volatility. The AUD/USD pivot point is 0.9359, with resistance at 0.9364, 0.9370 and 0.9375; and support at 0.9353, 0.9348 and 0.9342.

Meanwhile, New Zealand also enjoys a short working week, but theirs will be punctuated by an interest rate announcement on Thursday. New Zealand surprised the market by being the first major economy to raise interest rates again after the global financial crisis and another rate rise from 2.75% to 3.00% is forecast which may support New Zealand dollar strength. The NZD/USD pivot point is 0.8585, with resistance at 0.8588, 0.8590 and 0.8593; and support at 0.8583, 0.8580 and 0.8578.

What to Watch this Week: It is a comparatively quiet week for the markets, but USD/JPY continues to be an interesting pair to watch. Also EUR/USD is liable to be volatile in the wake of increasing tensions between Russia and Ukraine.

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