Mid-Day Report: Dollar Firm as Initial Claims Hit 8-Year Low, Euro Recovers on PMI

Dollar recovers strongly against yen today on rally in risk markets as well as solid job data. Initial jobless claims dropped by 19k to 284k in the week ended July 19, hitting the lowest level in 8 years since February 2006. That’s also much better than expectation of 310k. Continuing claims dropped by 8k to 2.5m in the week ended July 12, the lowest level since June 2007. USD/JPY is heading back to 101.79 resistance after the release. And, technically, break will be the first sign of near term reversal which would set up a test on 102.26 resistance. Overall, it’s looking rather likely that the pair has defended the key support level around 100 again.

Nonetheless, dollar’s strength is a bit overshadowed by recovery in Euro following solid economic data. Eurozone PMI manufacturing rose slightly to 51.9 in July, just missed expectation of 52.0. However, services PMI jumped to 54.4 versus expectation of a fall to 52.7. Germany PMI manufacturing rose to 52.9 versus expectation of 52.2. Services PMI jumped to 56.6 versus expectation of 54.7. French PMI manufacturing, however, dropped to 47.6 versus expectation of 48.5. But services PMI rose to 50.4 versus expectation of 48.9. However, Markit chief economist Williamson warned that there were growing concerns over the situation in Ukraine. And, “the likelihood is that companies will become increasingly reluctant to commit to making big decisions on purchases, investment and hiring in the face of such economic uncertainty, suggesting growth could weaken again.”

On the other hand, Sterling was weighed down by weaker than expected retail sales, which showed only 0.1% mom growth in June versus expectation of 0.2% mom. GBP/USD breached 1.7 handle today but is staying well above 1.6952 support for the moment. The pound lost some ground since yesterday’s BoE minutes. And the question is now on whether EUR/GBP is finally reversing on loss of downside momentum.

Released from China, the HSBC manufacturing PMI rose to 52.0 in July versus expectation of 51.2. That’s the highest level since January 2013. HSBC noted that “economic activity continues to improve in July, suggesting that the cumulative impact of mini-stimulus measures introduced earlier is still filtering through.” And, HSBC expected “policy makers to maintain their accommodative stance over the next few months to consolidate the recovery.”

The RBNZ raised the OCR for a 4th consecutive time, by +25 bps to 3.5%, in July. The central bank also signaled to pause in coming months so as to assess the impact of the first 100 bps of policy normalization. Yet, the outlook of the monetary policy continues to be tightening. On the economic outlook, the central bank remained about the economy, expecting growth of +3.7% across 2014. Concerning slower growth in New Zealand’s trading partners in early 2014, the RBNZ noted it was driven by temporary factors. Policymakers also noted a more moderate inflation outlook. Kiwi, the level of which was judged as ‘unjustified and unsustainable’, dropped modestly after the announcement although the decision came in line with expectations. We forecast the RBNZ to tighten in December. More in RBNZ Announced Last Rate Hike Before Pause To Assess Impacts.

Daily Pivots: (S1) 1.7013; (P) 1.7053; (R1) 1.7084; More

GBP/USD’s correction from 1.7190 extends lower today and reaches as low as 1.6990 so far. Intraday bias remains on the downside for 55 days EMA (now at 1.6974). At this point, there is no clear sign of trend reversal yet. Hence, we’d expect 1.6952 support to contain downside and bring rebound. On the upside, above 1.7099 minor resistance will turn bias back to the upside for retesting 1.7190 resistance. However, sustained break of 1.6952 will be the first sign on medium term reversal and will turn focus back to 1.6692 key support level.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. Based on unconvincing medium term momentum, we’d expect strong resistance from 50% retracement from 2.1161 to 1.3503 at 1.7332 to limit upside and bring reversal. Sustained break of 1.6692 will indicate medium term reversal and would turn outlook bearish for 1.4813 support.

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
21:00
NZD
RBNZ Rate Decision
3.50%
3.50%
3.25%

22:45
NZD
Trade Balance (NZD) Jun
247M
155M
285M
270M
23:50
JPY
Trade Balance (JPY) Jun
-1.08T
-1.11T
-0.86T

01:35
JPY
Manufacturing PMI Jul P
50.8
51.9
51.5

01:45
CNY
HSBC China Manufacturing PMI Jul P
52
51.2
50.7

07:00
EUR
France Manufacturing PMI Jul P
47.6
48.5
48.2

07:00
EUR
France Services PMI Jul P
50.4
48.9
48.2

07:30
EUR
Germany Manufacturing PMI Jul P
52.9
52.2
52

07:30
EUR
Germany Services PMI Jul P
56.6
54.7
54.6

08:00
EUR
Eurozone Manufacturing PMI Jul P
51.9
52
51.8

08:00
EUR
Eurozone Services PMI Jul P
54.4
52.7
52.8

08:30
GBP
Retail Sales M/M Jun
0.10%
0.20%
-0.50%

12:30
USD
Initial Jobless Claims (JUL 19)
284K
310K
302K
303K
14:00
USD
New Home Sales Jun

478K
504K

14:30
USD
Natural Gas Storage

107B

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