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Stronger data could change the currency outlook

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Stronger data could change the currency outlook

The European Central bank was the focus of currency traders on Thursday, but the statement was status quo putting pressure on the EURUSD throughout the trading session.  Slightly better than expected purchasing managers data, failed to buoy the currency pair as the dollar gain ground with attractive interest rate differentials.

The euro area purchasing manager’s index which gives investors a gauge of manufacturing output in the Eurozone climbed to 50.3 from the 50.1.  The print is the 4th consecutive increase and is now the highest since mid-2011.  The PMI was driven by stronger German reading 50.7 vs. 50.3 initial reading and a surprising gain in Italy above 50 helped by rising output, new orders and exports.

Wednesday FOMC statement does not appear to have changed the likelihood of tapering in September.  The statement refrained from giving hints about the reduction in long-term asset purchases and expressed more concern about low inflation, while characterizing US growth as modest rather than moderate.  The statement could be categorized as dovish and the Fed is likely to keep the petal to the metal with regard to QE.

The yield differential has moved in favor of the Euro over the past month, allowing the EURUSD to recover toward 1.32.  Weaker than expected data in the US has been the driver, but July data seems to have turned the corner.  Wednesday’s better than expected ADP jobs report, showed that US private sector jobs increased by 200,000 compared to the 150K expected by economists. Thursday challenger report also showed very few job layoffs.  Thursday decline in initial jobless claims also is pointing to relative strength. The turn in US activity is likely to change the trajectory of the yield differential and therefore the currency pair.

The EURUSD closed lower moving through support near the 10-day moving average at 1.3233.  Momentum seems to be flattening with the trajectory of the MACD pointing to lower prices.

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