Thursday afternoon through Friday saw US data come in a little weaker than markets had expected, data was primarily confidence focused however and it has had little impact on tapering expectations. EURUSD and GBPUSD both finished off their weekly highs and the USD remained firmer against most major counterparts as it look s to find strength into Septembers expected taper.
The Euro was less than inspiring last week as it failed to post any meaningful gains despite signs of a recovery emerging, particularly from the core. The improvement in regional data is not proving to be a catalyst of strength for the single currency. We mentioned this last week but it is worth noting again that the lack of EUR bullishness in what should be supportive data is concerning and leaves the euro vulnerable to negative data shocks.
Even narrowing yields on Eurozone debt did little to support the single currency, over the last three years signs any movement in peripheral yield has been closely watched, traditionally narrowing yields have been supportive of the Euro but even when the Spanish 10 year yields fell to with 250 pips of the German benchmark for the first time since August 2011, the Euro failed to react.
Today’s data calendar is virtually non existent and with nothing major on the cards we’d expect a relatively quiet trading day as markets prepare for the coming week. One of the highlights of the week will be the release of the FOMC minutes on Wednesday. As mentioned above we still expect tapering to begin in September but what is still unknown is the extent to which Fed easing policy will slow.
Another area we will be watching for is possible changes to the Feds thresholds, most notably on the unemployment rate. Should the Fed look to drop the unemployment target we are likely to have easing for a longer period of time which will be negative for the USD. As always we will keep our clients up to date with all movements.
The biggest data release for the week from Europe comes in the form of PM’s on Thursday. Both German and Eurozone composite figures will be released and will likely be the biggest risk catalyst for the week. PMI reading have always been a good proxy indicator for GDP so it will be interesting to see if we are still experiencing divergence between the core and periphery.