The North American trading session has been a bit of a practice in duality as US data showed both strength and weakness with early releases. The employment situation continued to prove robust with Initial Jobless Claims falling by 1k from last week’s total to 264k and Continuing Jobless Claims remaining low as well. In fact, both of the employment figures this morning are showing 4 week averages at levels unseen since 2000, and are likely earning gold stars from the Federal Reserve. Since the Fed has employment as one of their cornerstones for rate decisions, the consistency and breadth of improvements are extremely encouraging.
Unfortunately, if you are in the camp of expecting multiple interest rate hikes this year, the Fed doesn’t only use employment as an economic measuring stick; they use inflation as well. The Producer Price Index was released this morning along with employment data which declined 0.4% in April, and declined 1.3% over the last year. Negative figures in inflationary readings are the bane of the Fed’s existence as it is showing deflation instead of the 2% inflation they are seeking. In their most recent statement on the subject, the Fed mentioned that “inflation is anticipated to remain near its recent low level in the near term, but rise gradually toward 2 percent over the medium term.” If today’s further decline is any indication, it’s not remaining near recent lows; it’s getting worse.
As fun as it may be to gawk at the predicament of the USD, my colleague already did that earlier, so let’s look at something else. The GBP is a fascinating currency due to its re-emergence as a strong contender to replace the USD as the world’s favorite. The anticipated political meltdown never happened in the UK, and the GBP is making up for lost ground. The GBP/USD has surged over 600 pips in the last week and over 1200 pips in the last month. That’s impressive unless you take a look at the GBP/JPY which has climbed 750 pips and 1350 pips in the same time period and looks hungry for more. Even the Bank of England downgrading the UK growth forecast didn’t put much of a dent in the Sterling’s rally as seeds of optimism were highlighted more than the tamed expectations.
On the technical front, there are signs that this rally may not yet be exhausted. The beginning of the GBP/JPY rally from a month ago was following a relatively tight trend channel higher, but deviated from it right before the election. Interestingly, support was found at levels consistent with Fibonacci extensions away from that original channel, and has now returned to the channel merely a week after the politically stabilizing result. If the original channel is truly being reestablished, this pair may have 190 in its sights potentially before the week it through.
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