|The macro data out of Europe this week was mixed but loose Fed policy coupled with expected policy normalization in most other G10 countries continues to put pressure on the dollar. In Europe, German’s April Ifo business sentiment came in in-line with expectations, reflecting the current state of global affairs and the modest degrees of cautiousness surrounding recent events. The German-US two year spread widened to a new record high of nearly 117 basis points and in turn prompted the euro the reach a new 16-month high of $1.465. The markets remain focused on the outlook for central bank policy with the ECB still in hiking mode, while the Fed is on hold for the foreseeable future. A restructuring of Greece’s debt could force the ECB to recalibrate its expected rate moves if haircuts stoke concern about the state of the European banking sector and in turn fears over debt contagion reemerge.
The Dollar Continues to Crumble
Sterling is the strongest performer on week versus the dollar driven in part by the magnitude of the upside surprise in retail sales, accelerated by the return of risk appetite. Retail Sales jumped .2% month over month compared to the -.5% expected. Although the probability of a May rate hike has fallen considerably (10%), the expected rate hikes have merely been pushed back, not diminished. Overall, the general tone heading into the holiday weekend remains the same: loose Fed policy remains dollar negative, while abundant liquidity and low real interest rates are good for risk appetite, prompting demand for higher-yielding, growth-linked currencies.
The week began with a market swoon after S&P announced that it was placing the US on negative watch. Standard & Poor’s Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear. S&P stated that a downgrade is still unlikely, somewhere in the “1 to 3” range.
The move comes amid continued hand-wringing over the balance sheet of the world’s largest economy and disagreement among politicians on how to address fiscal woes as economic growth remains sluggish. S&P said Monday it sees material risk that policymakers might not agree on how to address budgetary challenges by 2013, which would render the U.S. fiscal profile weaker than that of other triple-A-rated countries. This news initially helped the dollar, but as the risk on trade came back after solid equity earnings in the US, the dollar reverse course and sold off.
The Pound Break Out on Dollar Decline
The Pound broke out toward the end of the week on better than expected retail sales. Support is seen at former resistance around 1.64, and then at the 20-day moving average near 1.63. Resistance is seen near 1.70.
Gold Shines Brightly on New Record High
Gold prices hit a new all time high above 1508 before settling off the highs of the day. Support is seen near the breakout level at 1475, and then the 20-day moving average near 1460. Resistance is seen at a channel high near 1515, and then 1600.
Next week the markets will be watching
Day Trading Course, Dollar Continues to Crumble – Gold Shines on New Record High