FX Market Update 5-6

Market Briefs
• EUR/USD -0.05%, USD/JPY -0.08%, GBP/USD 0.53%, EUR/GBP -0.56%
• DXY -0.02%, DAX 0.92%, FTSE -0.54%, Brent -1.29%, Gold 0.06%
• EU Markit Serv Final PMI, 53.8, 53.9 f’cast, 53.9 prev
• EU Markit Comp Final PMI, 54.1, 54.1 f’cast, 54.1 prev
• FR Budget Balance, -54.34 bln, -33.10 bln prev
• FR Markit Serv PMI, 54.3, 54.3 f’csat, 54.3 prev
• FR Markit Comp PMI, 54.2, 54.5 f’cast, 54.5 prev
• DE Markit Services PMI, 52.1, 52.1 f’cast, 52.1 prev
• DE Markit Comp Final PMI, 53.4, 53.1 f’cast, 53.1 prev
• GB BRC Retail Sales YY, 2.80%, -4.20% prev
• GB Markit/CIPS Serv PMI, 54, 53 f’cast, 52.8 prev
• Italy’s “government for change” seeking parliament’s backing
• Spain’s Socialists to name Maria Jesus Montero as new budget minister – PM aide
• Financial services to remain ‘national priority’ after Brexit – UK minister
• Qatar accuses Saudis of reckless behaviour after military threat report
• Gold steady amid rising risk appetite and U.S. rate-hike prospects
• Brent crude tilts lower as investors weigh supply rises

Looking Ahead – Economic Data (GMT) 
• 12:30 CA Labor Productivity Rate, 0.2% prev
• 12:55 US Redbook YY, 4.3% prev
• 13:45 US Markit Comp Final PMI, 55.7 prev
• 13:45 US Markit Svcs PMI Final, 55.7 prev
• 14:00 US ISM N-Mfg PMI, 57.5 f’cast, 56.8 prev
• 14:00 US JOLTS Job Openings, 6.400 mln f’cast, 6.550 mln prev

Looking Ahead – Events, Other Releases (GMT) 
• 11:20 The Head of Division at Bank of England, Martin Etheridge, speaks in London
• 17:30 Jens Weidmann, president of Deutsche Bundesbank, speaks in Brussels

Currency Summaries
*NOTE: Focus for this section will shift to a more topical, regional-based coverage that spans multiple currencies. Please look for this change in the coming days.

EUR/USD 
• EUR/USD trades a tight range close to 1.1700 anchored by options
• EUR/USD 1.1684-1.1708 in Asia and 1.1684/1.1716 in Europe
• EUR 2.8 bln expiries 1.1680-1.1725 today
• EZ data disappointed. EZ sales 0.1% vs 0.5% f/c. Service PMI slips to 53.8
• In contrast U.S. May services ISM is f/c higher to 57.5 from 56.8
• Data is due at 15.00GMT when today’s options will expire

USD/JPY
• An elevated USD/JPY trades a narrow 109.73-110.01 range so far today
• Yen has been sold on weak Japan data and continued “risk on” environment
• Wider 10-year UST-JGB yield spread has also continued to prop USD/JPY
• 30-day log correlation between USD/JPY and 10-year UST-JGB spread is high
• USD/JPY bulls face twin obstacles, 61.8% Fibo and 200-DMA
• Spot could rise to 111.50, according to options

GBP/USD
• Cable rose to 1.3384 after UK service sector PMI beat, 54.0 vs 53.0 f/c
• 1.3335 was high before the 0830GMT data release
• EUR/GBP down to 0.8743 on UK data beat vs 0.8785 early Europe high
• Service PMI beat follows UK manufacturing and construction PMI beats
• IHS Markit says May PMIs point to UK GDP growing at 0.3-0.4% in Q2
• BoE kept rates unchanged in May after meagre GDP growth of 0.1% in Q1

USD/CHF
• EUR/CHF has fallen to 1.1523 from an early Europe high of 1.1561
• Bids may emerge near 1.1500 (1.1503 was last Friday’s low)
• 1.1500 option expiry for 10am ET NY cut, EUR 226mn strike

USD/CAD
• USD/CAD has risen to 1.2972 from an early Europe low of 1.2915
• NAFTA fears are helping weigh on the CAD
• Mexico set to impose 20% tariff on U.S. pork legs – sources (Reuters)
• Offers expected around 1.3000 (1.3009 was last Friday’s high)

AUD/USD
• Profit-taking on longs helped deflate AUD/USD to 0.7623 European am low
• AUD/USD rose over 1% to a six-week high of 0.7666 Monday
• Bids are tipped near 0.7600 (former resistance level)
• Australian Q1 GDP data is due Wednesday at 0130GMT, +0.9% f/c
• RBA flagged upbeat outlook alongside unchanged cash rate decision

NZD/USD
• NZD/USD met headwind pre-0.7048 after rising from 0.7019 (late Asia low)
• 0.7048 was Monday’s 1mth high after rise in risk appetite boosted NZD
• GDT auction result expected circa 1400GMT, may impact NZD

FX Options
• Front end G10 Implied vols return to pre spike levels as calm returns
• Back end vols and EUR put options still underpinned by lingering euro concerns
• Lower vol levels attracting some demand now to limit deeper declines
• Huge 5bln expiries 1.1675-1.1750 today helping to contain EUR/USD again
• USD/JPY flows in to sub 1-month strikes toward 111.50 suggest upside potential

COMMENT

UK CPI upturn next week may lift sterling 
UK inflation data for May due next week will dictate sterling’s fortunes and the currency could catch a bid if the report shows annualized CPI rose from April’s 13-month low of 2.4%. A CPI rise would be a welcome boost for hawks advocating a BoE rate hike on Aug 2, as annualized CPI has been on a downward trajectory since scaling a five-year peak of 3.1% last November. The pound’s 3.43% fall against the USD last month could contribute to a reversal of the recent CPI downtrend, as could higher oil prices. The BBC reports that the RAC says UK petrol prices rose by six pence a litre in May, the biggest monthly increase since the RAC began tracking prices 18 years ago. UK earnings data is also due next week, a day before the inflation figures. On Monday, BoE MPC member Tenreyro said the timing of BoE rate hikes is an “open question”.

CHART OF THE DAY

EUR/USD set for usual June rise as focus turns to ECB
EUR/USD looks poised to head higher in coming weeks, especially if the new Italian government does not distract market focus away from the ECB, and as EUR/USD normally makes gains in June. An analysis of EUR/USD’s performance for each June since the year 2000 shows it has risen in 12 of the last 18 years, gaining on average 63 pips or 0.62%. Last week’s political uncertainty in Italy helped EUR/USD trade the eighth widest one-week range of 2018 (218 pips), but spot ended last week very close to where it started. Despite this indecision, the fact that last week’s candlestick line had quite a long lower shadow is normally a sign the market has rejected the downside. EUR/USD traders’ focus will increasingly turn to the timing of any ECB monetary tightening, especially as euro zone inflation was well above expectations in May. The rising and thick Ichimoku weekly cloud, which currently spans a 1.1216-1.1681 region, is providing a major technical prop for EUR/USD.

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