EURUSD, Daily       

U.S. ISM non manufacturing index dropped 2.8 points to 52.9 in May after rising 1.2 points to 55.7 in April. This is the lowest since February 2014. The index was 55.9 a year ago. The business activity index fell to 55.1 from 58.8. The employment component plunged to 49.7 from 53.0, matching the lowest since February 2014. New orders fell to 54.2 from 59.9. New export orders tumbled to 49.0 from 56.5. Prices paid was one of the few components posting a gain, rising to 55.6 from 53.4. Another disappointing report.

The dollar extended lower following the factory orders and services ISM results, where the former missed slightly and the latter missed significantly. EURUSD has rallied to 1.1348, matching the May 17 peak, as USDJPY fell to 106.77, levels last seen on May 6.

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EURUSD, Daily       

Bundesbank cuts growth and inflation forecast, sees balanced risks. After the ECB published its updated set of staff projections yesterday, the Bundesbank released its projections for Germany, which were taking into account in the ECB calculations. The working day adjusted forecast for GDP was cut to 1.6% this year from 1.7% previously and the projection for 2017 was cut to 1.6% from 1.9%. 2018 growth is seen at 1.7%. At the same time, the inflation projections were cut to 0.2% this year and 1.5% next year from 1.1% and 2.0% previously. Sharp downward revisions with the Bundesbank blaming oil price variations and seeing balanced risks, but with inflation seen at just 1.7% in 2018, this means headline rates will remain below the 2% upper limit for price stability for a lengthy period.

Eurozone services PMI revised up to 53.3 from 53.1 and the composite revised up to 53.1 from 52.9. This means the services reading improved slightly over the month, and the composite now shows an acceleration on the overall pace of activity, compared to a slight deceleration suggested by the initial numbers. National data was mixed, and especially the fact that the Italian services PMI fell back into contraction territory at just 49.8 and the overall composite Italian PMI is barely holding above the boom-bust line at 50.8 is worrying. Bund futures recovered earlier losses on the weak Italian numbers and as the French readings were revised down, but are off highs as German and Eurozone numbers were revised higher. Uncertainty remains high but the mixed data will add to the disappointment over the ECB’s failure to announce new measures.

All quite on the forex front as markets hunker down ahead of the U.S. employment report showstopper, to which the possibility, or not, of a Fed rate hike on June 15 hinges. The G3 currencies are on the day so far showing less than a net 0.15% net change against one another. EURUSD has been locked in the mid 1.11s and USDJPY has taken root around 109.00, having recovered from the 18-day low at 108.49 that was seen during the Tokyo session.

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EURUSD, H1     

US Q1 GDP growth was revised up to 0.8%. This rise was from 0.5% but undershot our estimates thanks to the lack of an expected boost in consumption and a big downward bump in intellectual property investment, alongside a slightly smaller than expected $8.7 bln inventory boost. We saw the expected moderate hike in construction and a slight trimming in equipment spending, alongside a surprising $5.6 bln net export boost, leaving a small hike in final sales growth to 1.0% from 0.9%. We’ll keep our Q2 GDP growth estimate at 2.0% until we can review Monday’s income report. The Q1 GDP data still depict an economy suffering from weak global growth, a surging dollar, and falling oil prices that are disrupting the export and petro sectors and contributing to the inventory overbuild. We have business fixed investment declines as companies right-size costs to diminished nominal revenue in the face of price weakness and consumption restraint from cautious households. We expect diminishing global, petro, and inventory headwinds in Q2 as GDP growth bounces. EURUSD rallied a little to1.1172 on the release only to fall back to 1.1152, all eyes now on Mrs Yellen and her conversation with Professor Mankiw.

Janne Muta

Chief Market Analyst

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