Macroeconomic overview: U.S. manufacturing production recorded its biggest increase in more than three years in April, bolstering the view that economic growth picked up early in the second quarter despite a surprise decline in homebuilding.
The broad strength in factory output reported by the Federal Reserve on Tuesday added to labor market data in suggesting the growth slowdown in the first quarter was temporary. That may allow the U.S. central bank to raise interest rates next month.
Manufacturing production jumped 1.0% last month, the biggest increase since February 2014, after falling 0.4% in March, the Fed said. The surge, which outstripped economists’ expectations for a 0.3% gain, reflected a 5.0% rebound in the production of motor vehicles and parts. There were also healthy increases in the output of machinery, fabricated metal products, appliances and furniture, business equipment and chemical products.
Manufacturing accounts for about 12% of the U.S. economy. Its recovery following a prolonged slump is being driven by a revival of the energy sector, which is spurring demand for machinery and other equipment.
In a separate report on Tuesday, the Commerce Department said housing starts dropped 2.6% to a seasonally adjusted annual rate of 1.17 million units, the lowest level in five months, hurt by persistent weakness in the construction of multi-family housing units.
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While the weakness in residential construction implies a slowdown in homebuilding investment, the Atlanta Fed is forecasting gross domestic product increasing at a 4.1% annualized rate in the second quarter. The economy grew at a pedestrian 0.7% pace in the first three months of 2017.
Interest rate futures showed the market was still pricing in a nearly three in four chance that the Fed will implement a June hike, but that was down from over 80% a week ago. Investors were pricing in slightly below an even chance for two or more rate increases in 2017, despite central bankers’ stated view that they will hike two more times this year.
Data on Tuesday showed the Eurozone economy expanded 0.5% on quarter in the first three months of 2017, the same as in the previous period and in line with the preliminary estimate. Year-on-year, the Eurozone economy expanded 1.7%, easing from a 1.8% growth in the previous period and in line with earlier estimates.
Today’s data showed that Eurozone inflation was 1.9% yoy in April 2017, up from 1.5% in March. Core inflation amounted to 1.2% yoy. The data were in line with preliminary readings.
European Central Bank Executive Board member Benoit Coeure said the bank is not concerned by a recent rise in euro zone bond yields as they reflect improved growth prospects, receding fears of deflation and increased risks from outside the bloc.
The June meeting is going to be significant as investors are looking for changes in forward guidance. Possible changes in the forward guidance likely in June include dropping the “or lower” reference to rates and adjusting the “well past” language to just “past” reference to when rate hikes will happen after net asset purchases end. It will not be until September that the ECB reveals its tapering plans for 2018 but the June meeting will provide insight into possible future communication changes.
Technical analysis: The 61.8% fibo of May 2016 to January 2017 drop is close (1.1127) and this is a key resistance now. The pair is above the weekly cloud and the top of the cloud at 1.1067 has flipped to support.
Short-term signal: Stay long for 1.1130. Profit locked in at 1.1055.
Long-term outlook: Bullish
USD/JPY: Stay short for 111.60
Macroeconomic overview: The dollar deepened its losses against the yen on Wednesday. Pressure on the dollar increased after news that Trump asked his now-dismissed FBI Director James Comey to end the agency’s investigation into ties between former White House national security adviser Michael Flynn and Russia, according to a source who has seen a memo written by Comey.
The memo raises questions about whether Trump tried to interfere with a federal investigation at a time when investors were beginning to doubt that his administration would be able to get a divided U.S. Congress to support its promised policy steps.
Bank of Japan Governor Haruhiko Kuroda said he told premier Shinzo Abe that the central bank will continue its ultra-easy monetary policy in a meeting held on Wednesday. The BOJ has kept monetary policy steady since revamping its policy framework in September last year to one better suited for a long-term battle against deflation. With the economy recovering steadily, investors expect the BOJ’s next move to be a reduction of monetary stimulus rather than an expansion.
Technical analysis: The USD/JPY has suffered a setback, falling below 112.90 – 23.6% fibo of the April-May rise. Bulls will be hoping that the 38.2% retrace of the same move will stem the bleeding. In our opinion further downward move is more likely scenario.
Short-term signal: Stay short for 111.60. Stop-loss lowered to 113.20
Long-term outlook: Flat
GBP/USD: UK wage growth falls behind inflation
Macroeconomic overview: British pay growth lagged inflation for the first time in two-and-a-half years in early 2017, underscoring the growing Brexit squeeze facing many households.
Average wages excluding bonuses rose by 2.1% year-on-year in the first quarter of 2017, the weakest increase since July and below market expectations for a 2.2% rise. That meant regular pay, when adjusted for inflation, fell by 0.2% in the first three months of the year, the first fall since the third quarter of 2014.
The unemployment rate in the January-March period unexpectedly fell to its lowest level in nearly 42 years at 4.6%. The market had expected the rate to remain at 4.7%.
Overall, the data is likely to bolster the Bank of England’s view that it should keep interest rates at a record just above zero, despite the sharp rise in inflation so far this year which is likely to hit 3% before long. The BoE says that despite the fall in unemployment, there is little pressure on employers to raise pay sharply which could feed a more permanent inflation problem. The BoE said there was little sign that companies planned to raise annual pay awards above the 2.0-2.5% level of recent quarters.
Another survey published on Wednesday showed inflation gnawed further into the budgets of British households this month, resulting in the sharpest fall in cash available to spend in two-and-a-half years.
Last week, Bank of England Governor Mark Carney warned 2017 will be challenging for consumers, with inflation now almost certain to overtake wage growth.
Technical analysis: The GBP/USD remains above the 14-day exponential moving average, which keeps the bullish structure intact. On the other hand, the pair is still capped by the May 8 high at 1.2990 and a corrective move cannot be excluded. Key support levels are 1.2845 (May 12 low) and 1.2842 (38.2% fibo of April-May rise).
Short-term signal: Flat
Long-term outlook: Bullish
TRADING STRATEGIES SUMMARY:
FOREX – MAJOR PAIRS:
FOREX – MAJOR CROSSES:
How to read these tables?
1. Support/Resistance – three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL – It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT – It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In – Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor – green “*” means high level of confidence (low level of uncertainty), grey “**” means medium level of confidence, red “***” means low level of confidence (high level of uncertainty)
5. Position Size (forex)– position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) – position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) – is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) – is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
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By GrowthAces.com – Daily Forex Trading Strategies