Forex today: a game of two halves caps EUR/USD’s advance, caps USD/JPY at 109.00

EUR/USD was bid up on the 5S/Lega coalition trying to form a new government.   IT/DE yield spreads were off their highs and the EU banking sector recovered in the benchmarks. The single currency made it to 1.1724 but was capped there, ignoring the higher than expected eurozone inflation data while US data put a bid in the greenback.  

EUR/JPY was tracking stocks and also weighed on EUR/USD due to Trump’s announcements of EU tariffs. Subsequently, EUR/USD fell to 1.1640. However, there was yet another pick up on headlines that an Italy government was formed. EUR/USD closed around 1.1680 ahead of the nonfarm payrolls and average hour earnings data on Friday in the US.

Sterling has managed to grind steadily higher since Tuesday’s low near 1.32   and  climbed on Thursday to threaten the 10-D SMA and  200-H SMA  around1.3350 in European trade, riding the risk-on ripples across the board on the coattails of EUR/USD and went onto to range between  1.3348-1.3279 in NY.  

“GBP is prone to weakness while the market remains below 1.3715, we feel. The break under here late last month implies downside risks extending to the 1.31 area in the next few weeks,”  

–  analysts at Scotiabank argued.

As for the cross,  EUR/GBP also climbed with a focus on 0.8794 (Monday’s  high) during the European am,  spurred by  further  decline in Italy bond yields on Italy govt hopes. For domestic data, the UK data reports were mixed earlier; house prices stayed soft in May, according to the “Nationwide” house price index (-0.2% M/M) but consumer credit demand was strong. The Gfk consumer confidence reading improved modestly (-7) and the Lloyds Business Barometer also arrived  positively  for May (35). However, Gfk explained that respondents  remained “resolutely downbeat on the state of the UK economy”, with Brexit uncertainty a likely culprit.

USD/JPY ranged between 108.40 and 109.00 and finished flat on the day. Wednesday’s widening of the   10-yr UST/JGB spread extended, fuelling USD/JPY bulls. however, risk-off markets kicked in and capped the advance to 109.00 (Japanese export hedging level) and sent the pair down to 108.39 the session low. Bulls then bid the pair up to a close of 108.79 ahead of Nonfarm  payrolls. The US 10yr treasury yield ranged between 2.82% and 2.88%, unchanged on the day at 2.85%. The Fed fund futures were continuing to predict two hikes by year end.

As for the Aussie, commodity-FX weighed with weakness stemming from Trump’s tariffs being levied and production levels in crude hitting new records. Metals were indeed heavy with copper finishing in a sideways chop for the month of May. Subsequently, AUD/USD  ranged sideways 0.7555 and 0.7593, however, AUD/JPY weighs heavy as does  Canada’s retaliation to US tariffs in terms of risk sentiment.  

Key notes from US session

Funda-FX wrap: Italy on course to a functioning coalition government, Trump announces tariffs on closest allies

Wall Street stocks drop on US tariffs on steel and aluminum

Key events ahead:

Analysts at Westpac offered their outlook for the day’s key events as follows: “There is no market-moving Australian data today, ahead of a busy calendar next week, focused on Q1 GDP  on Wednesday.

Asian data includes South Korea May CPI, Thailand May CPI and various May manufacturing surveys, including the China PMI sponsored by Caixin, seen remaining muted at 51.2.

None of this offers much distraction from the US May employment report. Consensus is 190k after 164k in Apr, which may have been hurt by unseasonal cold. The unemployment rate is expected to hold at 3.9%, a low since 2000. Deviations from these expectations should have limited market impact since the overall picture will remain of a relatively tight labour market.

The more sensitive data instead should be wages growth. Consensus is for a 0.2%mth rise in average hourly earnings, keeping the annual growth pace at 2.6%. Despite the steady fall in the unemployment rate, wages growth has been muted. Annual wages growth was 2.8% back in July 2016, so the employment report isn’t yet arguing for the Fed to pick up the pace of tightening.

A little after the employment data and thus overshadowed, we will see the May US national manufacturing survey from the ISM, expected to pick up to a healthy 58.2 from 57.3 in Apr.

Also on the slate are the G7 meeting in Canada, with trade obviously the hot topic and a no-confidence vote for Spanish PM Rajoy.”