Daily Report: Watch Eurozone HICP, US GDP & ADP before FOMC

Dollar remains generally firm against European majors as traders are preparing for FOMC rate announcement and statement today. Dollar is being supported by growing speculations that Fed is near to pausing it's policy easing cycle. Indeed, fed fund futures are pricing in around 20% odds that Fed will pause today and 70% odds that Fed will be on hold in June. Though, Fed is still widely expected to cut rates by 25bps to 2.00% today, with futures pricing in 80% chance. Focus is mainly on any change in the accompanying statement that signals that Fed is really near to a pause. The greenback will likely be boosted sharply if Fed does sound more confident that the monetary policy after today's cut will help save the economy from a deep and prolonged recession.

While FOMC is definitely the highlight of the day, a couple of economic data will probably trigger to additional volatility in the markets before that. From Eurozone, main focus will be on Apr HICP flash which is expected to slow from 3.6% to 3.4% yoy. Inflation has been a key factor in holding back ECB from cutting rates and stronger than expected inflation reading today will provide additional support to the Euro. However, due to the common currency's recent vulnerability against dollar and yen in particular, the sentiments and unemployment data to be released today could trigger some movements too. Other data in European session include German unemployment and Swiss KOF Leading Indicator.

From US, Q1 GDP will provide the first round of volatility in the US session. Annualized growth rate is expected to slow further from 0.6% to 0.4%, with significant slow down in personal consumption from 2.3% to 0.6%. ADP employment, which serves as preview to Non-Farm Payroll, is expected to show -60k contraction in the private job market in Apr. CHicago PMI is expected to drop from 48.2 to 48.0. Canadian GDP is expected to slow from 0.6% to 0.2% mom in Feb.

Sterling is so far the worst performer today after the release of much weaker than expected economic data. Apr Gfk consumer consumer confidence dropped sharply from -19 to -24, much worse than expectation of -20. Another round of selling is seen in early European session after release of nationwide house price which showed the first annual drop since 1996 by -1.0%.

BoJ left interest rates unchanged at 0.5% as widely expected. Inflation forecasts were revised up with FY08 core CPI up from 0.4% to 1.1%. FY09 core CPI is projected to be at 1.0%. However, growth forecasts were revised down with FY08 down from 2.1% to 1.5%. FY09 forecasts is projected to be at 1.7%. Governor Shirakawa said that the positive cycle in economy is weakening and downside risk is more serious than upside risks in FY08/09. Also, bank credit losses will likely be larger than forecasts but will not have serious impact on the banking system's stability.

A number of economic data are released from Japan earlier today. Manufacturing PMI dropped to 48.6 in Apr vs exp 49. Household spending dropped -1.6% yoy vs exp 0.5%. Unemployment rate dropped to 3.8% vs exp 3.9% in Mar. Industrial production dropped sharply by -3.1% mom vs exp -0.8% in Mar. Construction orders climb 6.4% but housing starts fell sharply by -15.6% in Mar.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.5520; (P) 1.5591; (R1) 1.5643; More

EUR/USD is losing some intraday downside momentum after fall from 1.6019 stabilizes. Still, intraday bias remains mildly on the downside as long as 1.5664 minor resistance holds. As discussed before, EUR/USD should have at least made a short term top after completing a diagonal triangle that started at 1.5342 with bearish divergence condition in 4 hours MACD and RSI. Also, the diagonal triangle should also be the last advance in a five wave rally that started at 1.4309. Hence further decline is expected towards 1.5342/66 cluster support (38.2% retracement of 1.4309 to 1.6019 at 1.5366). On the upside, above 1.5664 will indicate that an intraday low is in place and bring recovery. But upside should be limited by 1.5773 resistance and bring fall resumption.

In the bigger picture, firm break of 1.5342 support, which will also have EUR/USD sustaining below 55 days EMA (now at 1.5490) too, will confirm that rise from 1.4309 has completed with bearish divergence condition in daily MACD and RSI too. In such case, deeper decline should then be seen to 1.4309 and 1.4966 support zone. However, strong rebound will suggest that price actions from 1.6019 is probably just developing into another sideway consolidation. But still, risk is on the downside before sustained break of 1.6019 high.

Forex News Digest

• Market Preview: U.S. Dollar Vulnerable to Dovish FOMC Statement, Strategists Say
• The Day Ahead Canada & U.S.: FOMC, Q1 GDP, ADP Employment and Canadian GDP
• The Day Ahead Europe & UK: German Employment and Euro Zone Inflation
• U.S. Preview: First Quarter GDP to Come in Flat
• U.S. Preview: Economists Expect FOMC to Cut Once More Before Wait-and-See Mode
• U.S. Preview: ADP Employment to Fall by 60K in April
• CA Preview: Analysts Looking For Decline in February GDP Results
• EU Preview: Euro Zone Consumer Sentiment Expected to Fall in April
• EU Preview: Economists Not Expecting Change in German Unemployment Rate
• Dollar Heads for Monthly Gain Versus Euro on View Federal Reserve to Pause
• Bernanke May Need to Step Up Effort to Stem Rise in Banks' Borrowing Costs
• Pound Falls After Data Shows First Annual Drop in House Prices Since 1996
• New Zealand Dollar Falls to Three-Month Low; Australian Dollar Unchanged

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