Dollar Resuming Recent Rally, Sterling Tumbles after PMI, Canadian Up on GDP

Market overviews

Dollar resumes recent rally today and breaks last week’s high against all major currencies except Canadian Dollar. In particular, GBP/USD has taken out 1.3711 key support level after UK PMI manufacturing missed market expectations. The development is in line with the view of medium term reversal. AUD/USD also breached 0.7500 key support after RBA rate decision provided no support to the Aussie. Nonetheless, Canadian Dollar also picks up some solid buying after GDP beat expectations. Canadian GDP grew 0.4% mom in February versus consensus of 0.3% mom. That’s a solid rebound from January’s -0.1% mom contraction. Focus will turn to ISM manufacturing from US next.

UK PMI manufacturing dropped to 17 month low, increasingly remote chance for near term BoE hike

UK PMI manufacturing dropped to 53.9 in April, down from 55.1, below expectation of 54.8. That’s also the lowest level in 17 months. Rob Dobson, Director at IHS Markit, said in the release that the UK manufacturing sector “lose further steam” in Q2, with “growth of production, new business and employment all slowed.” And he added that “while adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance, making the chances of a near term hike in interest rates by the Bank of England look increasingly remote. And looking ahead ” the trend in manufacturing production is likely to remain subdued.” “Concerns about Brexit, trade barriers and the overall economic climate remained widespread.”

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Also from UK, mortgage approvals dropped to 62.9k in March, down from 63.8k, missed expectation of 63.0k. M4 money supply dropped -1.4% mom in March, below expectation of 0.2% mom.

EU warns Trump: We will not negotiate under threat

Just before the temporary exemptions on the steel and aluminum tariffs expire today, Trump announced to a 30-day extension on European Union, Mexico and Canada, allowing for further negotiation. Meanwhile, the US has reached trade agreements-in-principle with Argentina, Australia and Brazil and details with be finalized “shortly”.

European Commission criticized that  the US decision “prolongs market uncertainty, which is already affecting business decisions”. It reiterated that EU should be given full and permanent exemptions as the tariffs “cannot be justified on the grounds of national security”. Also, EU warned that “as a longstanding partner and friend of the US, we will not negotiate under threat.”

UK Department for International Trade spokesman welcomed the “positive decision”. And the government said in a statement that “We will continue to work closely with our EU partners and the US government to achieve a permanent exemption, ensuring our important steel and aluminum industries are safeguarded.” But, “we remain concerned about the impact of these tariffs on global trade and will continue to work with the EU on a multilateral solution to the global problem of overcapacity, as well as to manage the impact on domestic markets.”

RBA left cash rate unchanged at 1.50% as widely expected

Extending the streak for a 19th month, RBA left the cash rate unchanged at 1.50% in May. Benign inflation and recent slowdown in employment growth are allowing policymakers to keep the monetary policy accommodative. The accompanying statement was largely unchanged from the previous one, with the key positive coming from the forecast that GDP growth would rose above 3% this year. All in all, we retain the view that RBA would leave the policy rate unchanged for the full 2018. More in RBA More Upbeat on Growth, Likely on Hold for 2018.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3720; (P) 1.3755; (R1) 1.3799; More…

GBP/USD’s decline continues today and reaches as low as 1.3654 so far. The break of 1.3711 key support indicates medium term reversal. That is, whole rally from 1.1946 has completed. Intraday bias remains on the downside for 1.3448 fibonacci level next. On the upside, break of 1.3791 resistance is needed to be the first sign of short term bottoming. Otherwise, outlook will remain bearish even in case of recovery.

In the bigger picture, bearish divergence condition in daily MACD is raising the chance of medium term reversal. Also, note that GBP/USD has just failed to sustain above 55 month EMA (now at 1.4248) again. Focus is back on 1.3711 support. Firm break there will confirm medium term reversal and target 38.2% retracement of 1.1936 (2016 low) to 1.4376 at 1.3448 first. Break will target 61.8% retracement at 1.2874 and below. For now, sustained break of 55 month EMA is needed to confirm medium term upside momentum. Otherwise, we won’t turn bullish even in case of strong rebound.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
22:45 NZD Building Permits M/M Mar 14.70% 5.70% 6.40%
00:30 JPY PMI Manufacturing Apr F 53.8 53.3 53.3
04:30 AUD RBA Rate Decision 1.50% 1.50% 1.50%
08:30 GBP Mortgage Approvals Mar 62.9K 63.0K 63.9K 63.8K
08:30 GBP Money Supply M4 M/M Mar -1.40% 0.20% -0.30%
08:30 GBP PMI Manufacturing Apr 53.9 54.8 55.1
12:30 CAD GDP M/M Feb 0.40% 0.30% -0.10%
13:30 CAD RBC Manufacturing PMI Apr 55.7
13:45 USD Manufacturing PMI Apr F 56.5 56.5
14:00 USD Construction Spending M/M Mar 0.50% 0.10%
14:00 USD ISM Manufacturing Apr 58.5 59.3
14:00 USD ISM Prices Paid Apr 76.8 78.1

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