US Dollar Rally Cut Short by Drop in Durable Goods Orders

The US dollar rallied across the majors throughout much of the European trading session, but the release of data during the US trading session cut the move short. Indeed, the Commerce Department's most recent durable goods report showed that new orders fell 0.5 percent in April, led by a decline in transportation as Boeing reported only 58 airplane orders during the month, down from 99 in March. Indeed, excluding this factor, durable goods orders actually jumped 2.5 percent, the biggest gain in 9 months. A further breakdown of the index shows that business investment - as measured by capital goods orders excluding defense and aircraft - rebounded 4.2 percent following three consecutive months of declines, suggesting that companies feel a bit more confident about conditions down the road. As a result, we’ve seen that fed fund futures have moved increasingly in favor of no change in rates in June, with the markets only pricing in a 4 percent chance of a 25bp cut to 1.75 percent, down from 10 percent yesterday. These expectations are not likely to change drastically before the next rate decision, so what is most likely to be the biggest driver of day-to-day price action? USD/JPY. The pair has seen a pick up in volatility thanks to sharp moves in the equity markets, and if this trend persists, we could continue to see wild moves in the US dollar across the majors.

Euro: Economic Data Highlights ECB’s Slowing Growth, High Inflation Conundrum

Economic data out of the Euro-zone highlighted the European Central Bank’s biggest challenge: remaining focused on price stability as growth in the region slows. First, the Euro-zone’s seasonally adjusted current account balance hit a record low of -15.3 billion euros, as the strength of the currency hurt export growth. Indeed, the balance of goods payments fell 3.9 billion euros from a surplus of 4.5 billion euros last month. Furthermore, the services, income, and transfers balances all eased lower as well. Waning foreign demand for European goods will certainly take a toll on businesses in the region, particularly manufacturers, which will only add to the downside risks to growth associated with tighter credit conditions and building price pressures. Indeed, we also saw that the preliminary CPI reading for Germany – the Euro-zone’s largest economy – showed a greater than expected rebound through May as the index rose 0.6 percent. The monthly gain matched the biggest jump in 17 months, while the annual number was similarly strong at 3.0 percent, which is well above the ECB’s 2.0 percent target. With energy prices persistently hanging on to record highs and food costs refusing to ease, the risks to inflation are clearly to the upside. As a result, it is clear that the ECB will have little choice but to ignore the softening in the economy in order to maintain their hawkish inflation stance by leaving rates unchanged at 4.00 percent.

British Pound May Sustain Its High Volatility Thanks To A Busy Calendar

While most of the majors were looking at significant volatility thanks to a market-wide dollar rally, GBPUSD was particularly active this morning owing to a sharp increase in inflation expectations. Heading into the active European session, there were no major economic releases scheduled for release. However, a proprietary consumer inflation expectation survey compiled by Citigroup and YouGov proved an incredible driver for the sterling. With speculation growing that the MPC has already delivered the last of its cuts in its recent rate cycle, fundamental traders are clearly hungry for any data that will tip the scales in the inflation/growth clash. Therefore, when the lower tier indicator hit a record high with British consumers forecasting inflation trends to hit a 4.1 percent clip over the coming year, the market responded in kind. Since this indicator was not an official government reading of current price pressures and instead a reflection more of sentiment, the indicator was interpreted as a sign that consumer spending would plunge as Brits see their purchasing power declining. Looking ahead to Thursday’s session, we may see another round of volatile price action and perhaps a major breakout. The Nationwide housing inflation report is expected to contract for a seventh consecutive month while the CBI Distributive Trades Report for May is expected to reveal a drop in activity among retailers. This will be followed much later in the session by the GfK consumer confidence report.

Australian Dollar Unmoved By Strong Fundamentals, But Data Will Have A Second Chance

The com bloc was bound to range trading Wednesday despite high volatility in key commodities. This morning, crude prices tested a new weekly low before closing the US session nearly three dollar higher than where it opened at $131.03/barrel. For the Aussie dollar, volatility would be further boosted by a couple of top economic releases - though this price action would not come with direction. The Westpac Leading Index for March rose for the first time in three months to boost expectations of strong growth trends, while the first quarter construction activity report met its forecasted 2.3 percent rise. Looking ahead, Canadian the current account balance offers top event risk.

A Jump In Risk Appetite Drives The Yen Lower

There were few economic offerings from Japan’s economic docket this morning. The only noteworthy indicator to cross the wires was the small business confidence survey for the month of May. And, while the report’s more than five-year low stirred fundamental concerns over the health of the economy’s surprisingly strong pace of expansion; it would ultimately have little impact on the Japanese yen. Instead, a broad rebound in risk appetite and the carry trade would have its way with the yen crosses. An early morning drop in crude prices and jump in bond yields drove both GBP/JPY and AUD/JPY to significant technical breakouts and EUR/JPY and USD/JPY to test major resistance.

Kathy Lien is the Chief Currency Strategist at FXCM.