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Forex outlook:
The pair EUR/USD continues to bounce within the well established 1.3650-1.3400 range but the bias had clearly been to the dollar long side for most of the week as US data demonstrated surprising resilience. Both Durable Goods Ex-Transport and New Homes sales beat expectations with the later showing the largest 1 month jump in 14 years. A day later however, the market saw a completely different story as Existing Home Sales dropped below the psychologically key 6MM barrier recording their worst showing in 4 years.
The housing data clearly put the crimp into the dollar rally as the bear’s arguments regarding the slow motion housing crash appeared to have merit. Even though new home sales jumped 16 percent in the month of April, the biggest rise in 14 years, the median price of homes dropped 10.9 percent, the largest on record. This means that builders, especially corporate ones are in a rush to recoup their investments by having a fire sale on inventory. The far more price sensitive retail sellers in the Existing Home sector refused to slash prices and sales clearly suffered.
Given the fact that Existing Home Sales is a far larger market than New Home Sales, Friday’s news was clearly dollar bearish. However, the response in the EUR/USD was relatively muted, as traders looked ahead to next week’s key labor market data. Indeed healthy employment results will be crucial to supporting the dollar long thesis. The markets expect 140K print – far better than the 80K reading last month. The strong weekly jobless claims numbers last month offer support for a good Non Farm Payrolls number. However, if the NFP’s once again drop below the 100K level, the fallout is likely to be much more severe, as the few weeks respite in the dollar sell-off will come an end with traders once again becoming concerned about the prospect of a US recession in the second half of the year.
The euro ended last week mildly lower, as economic data out of Germany failed to attract new buyers. The final reading of first quarter GDP in the Euro-zone’s largest economy went unchanged at 3.6 percent, and while this reiterates the resilience of expansion in the region, the figures did not sway expectations for the European Central Bank. Even mounting optimism amongst German investors and consumers proved lackluster for EUR/USD. With a June hike essentially guaranteed after ECB President Jean-Claude Trichet brought back the phrase “strong vigilance”, markets are simply trying to figure out the central bank’s next move. However, the decision to raise rates beyond June will be largely dependent upon inflation data, and until we have confirmation that the ECB will maintain their hawkish bias, EURUSD could continue to suffer, albeit at a snail’s pace.
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