Fundamental Comment

This Week: Fed minutes, UK data in focus

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The most important events this week that could weigh on the movements of major currencies will be the Federal Reserve minutes and a number of important economic data from the United Kingdom.  

US Dollar

The U.S. dollar resumed its advance last week, reporting its fourth weekly gain over the past five weeks, buoyed by the sharp rise in U.S. 10-year Treasury yield to a seven-year high after the release of strong economic data last week.

The green currency has been benefitting from its clear monetary stance, which supports a gradual ease, where forecasts for four interest rate hikes this year surged to 55 percent while a June rate hike odds climbed to 95 percent.

Eyes will focus this week on the minutes from the May Federal Open Market Committee (FOMC) meeting to get views of policymakers regarding the economy and thereby assessing the interest rate hikes outlook.

By comparing the monetary policy stance adapted by the Fed to other major central banks, it is crystal clear that investors should hold the U.S. dollar.

However, investors should keep their eyes open on any developments from the U.S.-China trade negotiations, as it could dramatically weigh on the movements of the greenback.

Pound Sterling

The movements of the pound sterling will probably take some cues from the high relevance data due this week from the U.K., including the second GDP estimate, consumer price index and retail sales. 

The reading is likely to confirm a stability in the pace of growth at 0.1 percent in the first three months of 2018, confirming a strong ease from 0.4 percent in the last quarter of 2017.

U.K. CPI may signal a rise to 2.6 percent in the year ended April from a previous of 2.5 percent. That would be take inflation away from retreating to the BOE lower bound target of 2 percent.

Retail sales probably have surged 0.9 percent in April, following a 0.5 percent fall in March, according to analysts’ forecasts.

The retail sales will be carefully watched, as it will assess consumer spending in the first month of the second quarter. 

Hence, a rebound in retail sales could give some support to the pound that recorded its fifth straight weekly decline versus the U.S. dollar last week.

Euro

Last week, the euro remained under pressure amid worries from Italy after the two populist parties, Lega Nord and the radical left-wing Five Star Movement, agreed on a common programme, paving the way for a new coalition government.

The formation of this new government is threatening the spark of conflict with the EU regarding critical issues, most notably the national budget deficit rules, immigration and lifting sanctions on Russia.

On the economic front, investors will focus this week on a flash manufacturing and services composite PMI in the euro area, which may show a widening expansion in May to 55.2 from 55.1 in April.

If the data moved in line with expectations, it could give some support to the euro, especially as the first-quarter figures pointed to a slowdown. 

Investors will also track the release of the ECB minutes as it may include some clues about whether policymakers would hold stimulus to September or until the end of 2018.  

Commodities

Gold fell sharply last week on the back of the dollar’s strength and as the breach of $1300 an ounce level triggered a sell off in the metal.

This week, gold’s movement will probably be buoyed by any new updates about the trade talks between the U.S. and China, as well as the dollar’s movements.

Key support is currently found at $1285, while resistance is located near $1300 levels.

Regarding oil, it traded near the highest level since late 2014 last week, lifted by concerns about oil supply disruption from Iran on renewed U.S. sanctions. Brent crude surpassed the $80 a barrel mark for the first time in four years.

Strong Asian demand on crude and drop in U.S. crude inventories also were key drivers to the latest rally in oil prices.

This week, the EIA U.S. government report may show a rise by 0.11 million barrel in the week through May 18, following a 1.4-million-barrel increase a week before.  

In case the data matched forecasts, oil prices could ease from its record highs. 

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