EUR/USD, AUD/USD outlook: Forex Friday - May 17, 2024

• EUR/USD, AUD/USD outlook: Weakening US data should keep USD undermined
• AUD/USD outlook supported by rallying Chinese markets - can we see onset of another rally from key 0.6650 key support level?
• Week ahead: CPI from UK and Canada, RBNZ rate decision and Global PMIs

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week’s report, we will discuss the US dollar, euro and Aussie, and look ahead to the next week. Our EUR/USD and AUD/USD outlook remains bullish.

AUD/USD outlook video and insights on precious metals 

EUR/USD outlook: Dollar extends recovery – for now

After the mid-week volatility, FX markets have been far calmer in the last day and a half, with the dollar extending its recovery that begun on Thursday. The economic calendar is quiet today and will remain that way on Monday. We have a few macro events in the week ahead including CPI data from the UK and Canada, a rate decision by the RBNZ, as well as global PMI data which should be important for the EUR/USD in particular. But from the US, there are only a handful of data releases next week to offer direct influence on the greenback, plus some Fed speak. The key US data comes out on the final day of the month when core PCE is released, a week before the May jobs report comes out. Until then, I would expect to see some further dollar selling but at a more gradual pace. Our AUD/USD and EUR/USD outlook therefore remains bullish.

Before discussing the macro factors in greater detail, let’s quickly look at the EUR/USD chart.

EUR/USD outlook: Key levels to watch

The EUR/USD’s big breakout earlier in the week above the 1.0800 area has flipped the directional bias in bulls’ favour. The subsequent retreat we have seen in the last day and a half therefore is just a retracement of that rally. Unless we now go back below the breakout area of 1.0800 decisively, the path of least resistance remains to the upside. As such, I would expect the dip to be bought. Short-term resistance comes in around 1.0855, followed by 1.0885. Above these levels, 1.0900 and 1.1000 handle could be the next upside objectives.

Why has the dollar recovered, and can the gains hold?

Well, partly because of the lack of any major bearish catalysts either internally or externally, which has encouraged traders to book profit on their short dollar positions they had presumably opened earlier in the week. Thursday’s release of US data continued to point to an economic slowdown, although this was offset by a surprisingly large 0.9% m/m jump in import prices, which kept inflation worries high as rising import costs will only add to inflationary pressures.

The key question moving forward is whether investors will sell into this latest dollar recovery, and therefore buy the EUR/USD dip, given the recent signs of a cooling US economy? Or will worries that the Fed will push back rate cut expectations amid signs of sticky inflation keep the dollar supported? I think the former.

Much of the past hawkish repricing of US interest rates have already been factored into the markets, and the recent downturn in data is likely to apply disinflationary pressures on the economy. A rate cut in September looks likely and at least one more before the end of the year, possibly three.

AUD/USD outlook supported by rallying Chinese markets

Meanwhile the recent improvement overserved in European data in recent weeks should help the likes of the pound and euro, keeping the EUR/USD outlook positive. What’s the ongoing rally in Chinese equities market is a good sign for the positively correlating euro. The latest Chinese data released overnight was mixed. While industrial production was stronger, this was offset by disappointing retail sales. Additionally, new initiatives to support the beleaguered property market could not help the yuan either, although Chinese stocks did rally to a new 2024 high. The fact that we are continuing to see new 2024 highs in Chinese stocks, this goes to show sentiment towards China remains positive and that should be good news for commodities and commodity dollars like the AUD.

Watch out for a bullish breakout on the AUD/USD now that it has drifted back towards key support near 0.6650, which was a major resistance zone in the past. Can we see the onset of another rally here?

EUR/USD, AUD/USD outlook: Weakening US data should keep USD undermined

While the US dollar selling has stalled since Thursday, we have seen further evidence of an economic slowdown, adding to Wednesday’s disappointing macro pointers. It is becoming increasingly difficult to justify maintaining a bullish view on the dollar. On Thursday, jobless claims, industrial production, housing starts and building permits all came in weaker than expected. A day before, CPI missed expectations with a +0.3% m/m reading, and we also saw a flat headline retail sales figure, when a 0.4% increase was expected. What’s more, the Empire State Manufacturing Index painted another gloomy picture for the manufacturing sector, with yet another below-forecast negative reading. Earlier this month, the April non-farm jobs report, the latest ISM surveys and several other pointers, had all disappointed expectations too.

So, it looks like the US economic recovery is slowing, and this will help bring inflation down, reducing the need to keep monetary policy tight for an extended period of time. The Fed’s tapering of its balance sheet runoff has been an additional bearish factor for the dollar.

As a result, the EUR/USD could find renewed support now that it has dipped a little from short-term overbought levels near 1.0850. The EUR/USD remains on course to end higher for the fifth week. The AUD/USD is at its highest levels for the year, so clearly the trend has turned positive on the Aussie.

Week ahead: CPI from UK and Canada, RBNZ and Global PMI data

The US economic calendar is quite quiet next week, but we do have external factors that could move the dollar against selected currencies. Canadian and UK CPI and retail sales, global PMIs and RBNZ rate decision are among the highlights, putting pairs like GBP/USD, NZD/USD and USD/CAD into sharp focus. Meanwhile, Monday is a Bank holiday across most of mainland Europe, which could be another quiet session for FX.

RBNZ rate decision

On Wednesday, the Reserve Bank of New Zealand (RBNZ) is likely to maintain its wait-and-see approach and keep policy unchanged at 5.5% for yet another meeting. Our expectation is for yet another meeting. It was a year ago when the RBNZ last changed rates to the current level from 5.25% previously. The NZ central bank is likely to affirm its stance that this level will need to persist for an extended period to re-establish inflation within the 1-3% target range. Furthermore, we anticipate the RBNZ will reiterate its observation that despite subdued economic growth, inflationary pressures remain heightened. The RBNZ's projections will likely indicate a return of inflation to approximately 2% by the conclusion of 2025. This trajectory implies interest rates will not change until 2025, even if the market has started to price in rate cuts for later this year.

UK CPI

UK data have shown surprising strength in the last couple of weeks. Last week saw Average Earnings Index including bonuses come in higher-than-expected at 5.7% in the three months to March compared to a year earlier, adding to the above-forecast 0.6% growth in the first quarter GDP we saw the week before. The UK economy is making strides towards recovery after a dismal couple of years marked by low output and high inflation. With CPI cooling to 3.2% y/y in March, investors have translated the recent data surprises as a goldilocks scenario, sending the UK 100 to repeated all-time highs. If the latest CPI reading on Wednesday now falls more than expected (2.7% forecast) then this could further support UK stocks.

Meanwhile UK retail sales are due out on Friday.

Global PMI data

We have seen lots of evidence that the US recovery is starting to fade, just as growth in Europe and elsewhere have started to pick up. Thursday’s release of PMI data from Eurozone and UK’s services and manufacturing sectors will provide us with more insights about the potential recovery in Europe. Are we finally going to see a return to growth of manufacturing PMIs following nearly two years of sub-50 readings for German, French and UK manufacturers? Even if the pace of contraction slows more than expected, this would still be positive news given how poor the sector has performed in recent years.

Canadian CPI

Sentiment towards the Canadian dollar has improved, even if the Bank of Canada is seen reducing interest rates before the Fed. In April, the BoC maintained rates at 5%. It is awaiting a sustained decrease in core inflation before considering rate reductions, which we think might be on the cards in the upcoming meeting on June 5. The BoC could then gradually reduce the policy rate by 75 basis points to 4.25% by the end of the year, data permitting.

However, we have seen some stronger data from Canada lately. April witnessed a surprisingly robust increase of 90,000 jobs and a steady 4.7% year-on-year wage growth. Additionally, the Canadian government has recently introduced stronger-than-expected stimulus measures. These factors pose an increasing risk that the BOC might postpone rate cuts until later in the year. This could keep the CAD in favour against weaker currencies.

In the week ahead, we have Canadian CPI on Tuesday and retail sales on Friday to provide the North American currency fresh direction.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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