Markets have been waiting for a chance to reassess trend growth in the US economy now that the disruptive effects of this year’s cold winter are behind us. The March data is starting to come through and so far it hasn’t been encouraging.
Traders don’t appear to have enough evidence to be convinced that Fed monetary tightening will come later or be more gradual than previously anticipated. But this scenario is shaping as a distinct possibility, leaving markets in a state of indecision. The EURUSD currency pair reflects this mood and has developed some key chart levels that might prove useful for reading how the market sees Fed plans.
Here’s a summary of the major US economic data for March we’ve seen so far:
- ISM Manufacturing PMI. This read 51.5 and has been drifting consistently lower since peaking at 58.1 in August. Amongst other things, the stronger $US appears to be impacting export orders
- Industrial Production: fell 0.6% and rose only 2% compared to March last year. As well as the impact of a stronger currency, reduced spending on new equipment in the oil industry is dampening production.
- Retail sales: The post winter recovery was more muted than expected. Retail sales ex auto and gas rose 0.5% in March compared to an expected 0.6%. This suggests that consumer frugality remains intact.
- Jobs growth: was well below expectations at 126,000 leaving the unemployment rate steady at 5.5%. This probably reflects the lagged impact of the cold weather and follows a run of strong numbers but creates an element of doubt.
There’s a lot more data to come and the key numbers for Fed plans are probably going to centre around inflation and wage growth. Even so, this run of weaker data for March and the impact of the cold winter look like producing pretty uninspiring US GDP growth in the first quarter. Consensus forecasts are now 1.4% pa for the quarter.
The Eurozone, on the other hand, seems to be feeling the benefits of the currency wars. Its industrial production rose a healthy 1.1% in February.
So what can the EURUSD forex chart tell us about how market consensus sees the US economy? The outlook for changes in relative interest rates and monetary policy tends to bet the key short term driver of exchange rates. So EURUSD is a good proxy for market thinking on the Fed.
Current market character: Eyeballing the chart, it’s obviously been moving broadly sideways since mid-March. This is also reflected by the 20 day moving average which, after a lag, stopped falling and is now also moving sideways. However, the depth of this sideways range is deeper (more volatile) than the last sideways movement back in February.
One good indicator for strong trends is that the corrections tend to be shallow and stop short of previous lows. Today's candle has pushed through the last low that I've labelled 1st resistance. This is another sign that EURUSD has lost its downward impulsion and is now in a choppy consolidation mode. This could see price continue to oscillate around a flat 20 day moving average.
Bearish scenario: If we get ongoing choppy behaviour thebearish scenario could of course still return. The sign that this is happening would be for price starts to fall well below the average like it did back in late February.
Bullish scenario: At this stage, to form the view that sideways movement is going to morph into real Euro strength ($US weakness) you would probably want to see a clear break above the 2nd resistance at 1.105