EUR/JPY Turns Neutral

The US Dollar was unchanged or higher against its other G10 counterparts in the wake of last week's solid US jobs data. Last week's data prompted traders to slightly increase bets that the Fed will lift rates in June next year. Several economists toyed with the idea of bringing forward their forecasts for a Fed rate hike, although most held firm. We continue to believe that the market will eventually have to bring its forecasts more into line with the FOMC's more aggressive forecasts for Fed Funds and that this change will cause the dollar to strengthen over the next several months. Indeed, given the strong employment data released last week, we could even see the FOMC moving up its forecasts, which would cement the policy divergence that's underpinning the dollar.

On Friday, Sweden’s finance minister changed nation’s economic growth forecast for this year and next, citing lower-than-expected demand for the country’s exports adding to the loses of Swedish krona. The largest Nordic economy is now expected to expand 2.5% this year, compared with April estimates of 2.7%. Although SEK has weakened considerably, we still believe it is likely to weaken further over the medium term.

On Wednesday, Fed will release the minutes from its 17-18 June meeting. The statement from the meeting was judged as relatively dovish albeit the projection for leading fed funds rate was revised slightly higher by FOMC members. In particular, Janet Yellen downplayed the recent increase in inflation at the press briefing. It will be interesting to see if this view is broadly shared by other FOMC members. Also, the market will be looking for any indications of when the Committee members think it will be appropriate to begin raising rates.

The Bank of England's MPC are unlikely to alter policy in their meeting on Thursday, but the risk of a rate rise is higher than it has been before. One thing that will matter for rate rise timing is growth momentum in the second half. Manufacturing and industrial production on Tuesday and construction data end of this week will give us more insights about how Q2 has turned out. While the meeting itself is likely to be another non-event for the market, as usual, the minutes of the meeting, which will be released on the 23rd of July, will be keenly watched and should prove more important.

Today: During the European day today, the main event will be Germany’s industrial production for May. The forecast is for the pace of output to have remained unchanged on a monthly basis, whereas the yoy rate is expected to have accelerated. Canada’s building permits for May are forecast to have increased in pace compared to the previous month.

We have two speakers scheduled on Monday’s agenda. ECB Governing council member Ewald Nowotny and Swedish Riksbank Governor Stefan Ingnes.

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As for the rest of the week, the calendar remains light. Besides the UK’s industrial and manufacturing production figures for May we get Switzerland CPI for June. We also get Japan’s current account balance and German trade balance figures, both for May. On Wednesday, during the Asian morning we get China’s CPI and PPI for June, while from Australia, we get the Westpac consumer confidence index for July. In the US, the FOMC release the minutes of their latest policy meetings, whereas from Canada, we get housing starts for June. On Thursday, in addition to the BoE meeting, Australia releases its unemployment rate for June, while from Japan, we get machinery orders and Tertiary industry activity both for May and PPI for June. During the European day, we get June CPI data from Sweden and Norway. French June CPI data is also released, alongside nation’s industrial and manufacturing production for May. Finally on Friday, the main indicators released will be Canada’s unemployment rate for June and German final CPI for the same month.

The EUR/USD continued moving lower on Friday, but the decline was halted at 1.3580 (S1). A dip below that hurdle may signal that the recent advance was just a 38.2% retracement of the 8th May- 5th June decline, and could pave the way towards the key support of 1.3500 (S2). The MACD remains below both its trigger and zero lines, but the RSI retested its 30 level and moved slightly higher. As a result, I cannot rule out some consolidation or a bounce before the bears prevail again. In the bigger picture, the 14-day RSI fell below its 50 level, while the daily MACD, already in its negative territory, seems ready to cross below its trigger line. This amplifies the case of further declines in the near future.