Daily Report: Focus Still on Inflation

Dollar is mildly firmer today as markets await CPI inflation data from the US. Speculation that Fed has done its rate cutting cycle continues to build. Yesterday's Fedspeaks showed the members are getting more concerned on rising inflation. While Bernanke still described financial markets conditions as being "far from normal", his speech suggested that Fed may inject more liquidity into the banking system, while keeping interest rates unchanged. Futures are showing a 94% chance that Fed will be on hold on at 2.00% on Jun 25, with the rest of the bets on a 25bps cut. Headline CPI is expected to be unchanged at 4.00% yoy in Apr while core CPI is expected is expected to be unchanged at 2.4% yoy. The data, if comes in as expected, will solidify such speculations.

Before that, UK employment data and BoE quarterly inflation report will be the main focus in European session. Unemployment rate in UK is expected to be unchanged at 5.2% in Mar while claimant is to be unchanged at 2.5% in Apr. The quarterly inflation report could show revision of Feb's forecasts after acceleration in inflation in both input prices and consumer prices. Expectation on when BoE will cut again flip-flops in recent weeks after a series of weak growth data were followed by strong inflation data. Markets will look into the report for hints on whether BoE will cut again in Jun or Aug.

The Japanese yen has been the weakest major currency this week so far, reversing most of last week's gains. Data from Japan today saw domestic CGPI easing from 3.9% yoy to 3.7% in Apr but being above consensus of 3.6%. Trade surplus widened slightly more than expected to 1250b in Mar.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.5414; (P) 1.5490; (R1) 1.5550; More

EUR/USD continues to stay in tight range after rebound from 1.5284 was limited below 1.5594 resistance. OUtlook remains unchanged for the moment. While further recovery could be seen, decline from 1.6019 should be in force and expected to resume as long as 1.5594 resistance holds. Below 1.5363 minor support will suggest that such correction has completed and bring retest of 1.5284 low. Break will confirm whole fall from 1.6019 has resumed for next short term target of 1.4966 cluster support (61.8% retracement of 1.4309 to 1.6019 at 1.4962) and probably below. However, break of 1.5594, with bullish convergence conditions in 4 hours MACD, will indicate that fall from 1.6019 has possibly completed and will bring stronger rebound towards 1.6019 high.

In the bigger picture, as mentioned before, EUR/USD's rise from 1.4309 should have completed at 1.6019 with a diagonal triangle pattern that started at 1.5342 and with bearish divergence condition in daily MACD and RSI. Deeper decline is in favor to be seen to 1.4309 and 1.4966 support zone. However, strong rebound from the current level, followed by break of 1.5594 resistance, will suggest that price actions from 1.6019 is probably just developing into another sideway consolidation. But still, short term risk is on the downside before sustained break of 1.6019 high.

Forex News Digest

• The Day Ahead Canada & U.S.: U.S. Inflation Data
• U.S. Preview: April Core CPI to Repeat Previous Month's Gain
• The Day Ahead Europe & UK: French and Italian Inflation; UK Employment
• Poor UK Inflation Data Will Complicate MPC's Job, Economists Say
• Closing Market Recap: Crude Breaks Records, Loonie Retreats from Parity
• Tuesday's News Recap: Energy Prices Soar, Fed Speakers Cautious on U.S. Recovery
• Fed's Yellen Says Monetary Policy is Appropriate for Dual Mandate (Update 2)
• Fed's Honeig Says Inflation Rates Are at Unacceptable Levels
• Dollar Rises for Second Day Against Euro Before U.S. Consumer-Price Report
• EU Officials Welcome Euro Decline, France Says May Still Be 20% Overvalued
• Asian Currencies Decline on Speculation Federal Reserve to Halt Rate Cuts
• Australian, New Zealand Dollars Decline on Concern Economic Growth to Slow

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