Can the Buck Keep it Up?

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Market Drivers May 2, 2018
UK PMI Construction PMI beats
EZ data in line
Nikkei -0.16% Dax 1.20%
Oil $68/bbl
Gold $1309/oz.
Bitcoin $9128

Europe and Asia:
GBP UK PMI Construction 52.5 vs. 50.5 eyed
EUR EZ GDP 0.6% vs. 0.4%

North America:
USD ADP 8:15
USD FOMC 14:00

FX markets geared up for a busy day of data in the North American session awaiting several releases that could make or break the current dollar rally. Meanwhile, in Asian and European trade the dollar held its own against the yen, but commodity dollars, euro and cable all rebounded from the lows set yesterday.

Cable saw the biggest relief rally as the pair rose to 1.3650 in the wake of better than expected PMI Construction reading. The report came in at 52,5 versus 50.5 eyed showing the first upside UK economic surprise in days. For cable longs, all hope now rests with the very important PMI Services figure due Thursday. The market is expecting a rebound to 53 and if the data delivers it could preserve the chances of a BOE rate hike next week. If not, however, the pair could fall to 1,3500 on full capitulation of the bulls as the market begins to price in the risk of recession in the UK.

In Europe the GDP data came in line at 0.4% and euro saw little reaction to the news dropping back towards 1,2000 after rallying to a high of 1.2033. The 1.2000 figure is now acting a true support with FX traders trying to figure out the full extent of the dollar rally.

The greenback has been in a breakout mode for the better part of the past two weeks as monetary policy divergence and interest rate differentials put the bid in the buck. But US economic data has failed to live to expectations. Although US economic activity has been solidly expansionary it’s far from the 3% rate that traders expected at the start of the year.

Today’s data, therefore, could be critical to the dollar rally as the market will get a look at ADP figures which could forecast the NFPs and will hear from the Fed later in the afternoon. The Fed is expected to leave policy unchanged and maintain its hawkish tone, so any deviation from that baseline could cause the dollar to wobble. On the other hand, a solid 200K print from ADP and a confirmation from the Fed that it remains all systems go on normalization could push USDJPY through the key 110.00 resistance and keep the rally momentum going.

Boris Schlossberg
Managing Director

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