FX: Will The Global Recovery Shine This Week?

For the past few weeks investors have been focused on the U.S. recovery and its impact on the U.S. dollar. They were sorely disappointed when non-farm payrolls and retail sales came out well under expectations, but so far the dollar’s losses have been limited. Even stocks which declined on Monday is off last week’s lows. This nonchalant attitude stems from the market’s confidence in the global recovery. While some Asia countries tightened coronavirus restrictions, European nations are easing them. The UK kicked off the week with less restrictions on travel and indoor dining. In the euro area, Spain ended their curfew last Sunday. Today, Italy said they would phase out their curfew over the next week. On Wednesday France will move back its curfew from 7 pm to 9 pm as restaurants and cafes reopen outdoor seating. This will be pushed out further to 11 pm on June 9th if cases continue to fall.

U.S. dollar banknote with map

Image Source: Unsplash

The global recovery could shine this week especially in Europe. Some of the most important economic reports on this week’s calendar are Eurozone and UK PMIs. From the UK, labor market, consumer spending and retail sales numbers are also due for release. On balance, all of these reports should be stronger. Despite widespread lockdowns in March and April, German businesses grew more confident. U.K. data should be particularly good with the government reopening pub gardens and shops in mid April. Euro and sterling are our favorite currencies this week as we look for EUR/USD to test 1.22 and GBP/USD to hit 1.42.

The lack of market moving U.S. data should also help euro and sterling climb higher. The last non-farm payrolls and retail sales reports were very weak but there’s no doubt that the U.S. economy is recovering and the positive momentum will continue. Even the Empire State index which beat expectations but declined from the previous month fell primarily on supply constraints. In the near term, we expect weakness in USD/JPY, with a likely move below 109 but in the long term, U.S. data will improve which will revive demand for U.S. dollars.

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