FX update

The FX markets have been a little bit livelier today even if the economic calendar has been fairly quiet with the exception of services PMI data from both the UK and US. The pound went from being among the weakest yesterday to strongest this morning after the UK services sector PMI came in one whole point above expectations at 54.0, up from 52.8 previously. But the GBP/USD’s gains has since been capped once again by a rallying US dollar, which has remained overall supported after that strong US payrolls report on Friday was followed by further forecast-beating data today. Meanwhile the euro weakened on the back of disappointing Eurozone retail sales which rose in April by just 0.1% instead of 0.5% expected, while Italy’s newly-appointed Prime Minister Giuseppe Conte’s speech apparently also weighed on the single currency. Elsewhere, the Reserve Bank of Australia’s policy meeting overnight was another non-event with the central bank. The lack of any bullish catalyst meant that the Aussie would give back a big chunk of its gains from the day before, although the RBA did point out that wage growth may have bottomed in Australia but that it remained well below normal. The AUD/USD’s key level at around the 0.7655/70 area did indeed turn out to be a strong resistance.  Other commodity currencies were also trading softer today with Canadian dollar in particular weakening as oil prices slumped for the fourth consecutive day amid speculation that the OPEC will agree to raise its output in the second half of the year in order to avoid a potential supply shock.

US data stronger than expected

In the afternoon, the US dollar extended its gains on the back of further good news from the world’s largest economy. The May ISM services came in at 58.6 versus 57.6 expected and up sharply from 56.8 the month before. The prices-paid sub-index climbed to 64.3 from 61.8 previously, pointing to higher inflation. Separately, Markit’s Final Services PMI also beat expectations at 58.6 compared to 56.8 previously. According to Markit: "Inflationary pressures intensified in May, as input cost inflation accelerated to the fastest since October 2013.” Meanwhile there as further good news from the jobs markets as JOLTS Job Openings, which excludes the farming industry, soared to an all-time high of 6.7 million in April compared to 6.49 million expected and 6.55 million the month before.

Overall, today’s economic data, especially from the US, has been strong. This continues to support the view that the Federal Reserve will hike rates more aggressively over time than any other major central bank and that two further rate increases could be on the cards this year after the Fed almost certainly tightens its belt again next week.

But with the dollar already rising sharply over the past several weeks, don’t be surprised if it fails to maintain that momentum despite the strength of the data. Indeed, at the time of this writing, the greenback was pulling back a little, while European stock indices gave up their earlier advance. This slight risk-off tone helped to support gold and silver.

Looking ahead, there are no further top tier economic data scheduled from North America for the rest of today but in Asia we will have the Australian GDP to look forward. The Aussie economy is expected to have expanded by 0.8% in the first three months of the year compared with 0.4% in the last three months of 2017. If expectations are confirmed or bettered then the Aussie dollar may resume its bullish momentum.  

USD/CAD trying to breakout

As a result of improvement in US data and a sell-off in the price of crude oil, the USD/CAD rallied back above the 1.30 handle this morning before finding some resistance at around 1.3050. The latter is where a long-term bearish trend line comes into play. If the Loonie were to close above this level today or in the coming days then this would confirm a bullish breakout. If this turns out to be the case then the USD/CAD bulls could target the next resistances at 1.3220 or even 1.3400 as their next objectives. However, the bullish bias would become invalidate in the event of a false breakout and/or a subsequent drop below the 50-day average and most recent short term swing low at 1.2820. In this potential scenario, a return back to the 200-day average at 1.2660 or even lower could not be ruled out.