Forex Weekly Outlook May 21-25 – How high can the dollar go?

The US Dollar ended the correction and rode higher alongside bond yields. Will this continue?   The FOMC Meeting Minutes stand out and also watch out for Durable Goods Orders and events from other places. Here are the highlights for the upcoming week.

US yields were the main story, rising towards 3.10% on the benchmark 10-year yield, the highest since 2011. Other maturities are already at their highest since 2008 and 2009. The move began before US Retail Sales came out as expected and with upwards revisions. Other economic data were OK and the greenback took advantage of everything. A new populist government in Italy weighed on the euro while a rise in UK jobless claims hurt the pound. The Australian dollar received support from an upbeat job report while the Canadian dollar struggled after weak inflation and retail sales figures.

1. UK Inflation data: Wednesday, 8:30. Alongside other signs of a slowdown, UK inflation decelerated to 2.5% in March, more than had been expected. It lowered the expectations for a rate hike. The same level of annual inflation is projected for April. Another slowdown in inflation could weigh heavily on the pound. Core CPI is projected to slow from 2.3% to 2.2%. The Retail Price Index (RPI) carries expectations for a rise from 3.3% to 3.4% while PPI Input is expected to jump by 0.1% m/m after falling by 0.1% last time.
2. US  New Home Sales: Wednesday, 14:00. Sales of new homes trigger wider economic activity such as spending on infrastructure and are correlated with the wider economy. After an annualized level of 694K sales in March, a small slowdown to 680K is on the cards for April.
3. FOMC Meeting Minutes: Wednesday, 14:30. The Federal Reserve publishes minutes from its meeting in early May when it decided to leave the interest rate unchanged and made some subtle changes to the statement, such as describing the inflation target as symmetric, a wording that triggered speculation that the Fed will tolerate higher rises in prices after a long period of low inflation. Markets will also want to hear a message that the June hike is on track. It is priced in.
4. ECB Monetary Policy Meeting Accounts: Thursday, 11:30. The European Central Bank did not change its policies in April and refrained from making any announcement. ECB President Mario Draghi described the economic slowdown as a “moderation” and named temporary factors. The meeting minutes from that event will provide a look into the deliberations within the Governing Council. How worried are the members about lower growth rates and falling inflation? The QE program is seen as ending at the end of the year with an interest rate hike sometime in 2019. The minutes will help shape expectations and will move the euro.
5. US  Existing Home Sales: Thursday, 14:00. While a sale of an existing home has a smaller economic impact than one of a new home, the majority of transactions are in the secondary market. A level similar to 5.60 million annualized units seen in March is projected for April.
6. Japanese Tokyo Inflation: Thursday, 23:30. Inflation is slowing down in Japan, with core figures moving further away from the 2% target the BOJ is trying to achieve. After the National Inflation figures for April added to the slide in the yen, the Tokyo figures are now eyed, as they provide up to date data for May. The most important component is the one excluding fresh food. After an annual rise of 0.6% in April, a repeat of the same number is on the cards for May. Prices excluding food and energy are projected to rise by 0.4% y/y after 0.3% beforehand and the headline number is predicted to accelerate from 0.5% to 0.8%.
7. UK GDP (second release): Friday, 8:30. The first report of UK GDP in Q1 was a big disappointment: 0.1% q/q and 1.2% y/y, well below expectations. Bad weather was partly to blame. The second release is expected to show an upgrade to 0.2% q/q and 1.3% y/y. The Bank of England expects the economy to pick up in Q2.
8. US Durable Goods Orders: Friday, 12:30. The indicator reflects investment and also feeds into GDP. In March, headline orders jumped by 2.6% and a drop of 1.4% is expected for April, already in the second quarter. Core orders rose by 0.1% according to the final figure for March and will likely print a similar read this time.
9. Jerome Powell talks Friday, 13:20. The Chair of the Federal Reserve will participate in a panel called “The future of central banking?” in Stockholm, Sweden, alongside BOE Governor Mark Carney. While this is a panel discussion, the topic implies potential commentary about the economy and current affairs. Any hint about the upcoming June decision will be eyed by markets.

*All times are GMT

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Further reading:

• EUR/USD forecast – for everything related to the euro.
• GBP/USD forecast – Pound/dollar analysis
• USD/JPY forecast – the outlook for dollar/yen
• AUD/USD forecast – projections for the Aussie dollar.
• USD/CAD forecast – Canadian dollar predictions

Safe trading!