NZD yawns as manufacturing index slowsThe New Zealand dollar has posted small gains in Friday trade. In the European session, NZD/USD is trading at 0.7190, up 0.13% on the day. The pair is down 1.22% this week and is poised to have its worst weekly performance since mid-March.
The BusinessNZ Manufacturing Index fell in April to 58.4, down from 63.6. Although this was a significant drop, investors do not appear to be concerned, as the response of the New Zealand dollar has been muted. The index still remains well into expansionary territory, above the 50-level which separates expansion from contraction. Global conditions have improved, which bodes well for the manufacturing sector.
The New Zealand dollar plunged on Wednesday, as risk sentiment deteriorated after the US inflation report massively outperformed. This sent global equity markets and risk currencies like the New Zealand dollar sharply lower. The surge in inflation was a signal for many investors that higher inflation is here to stay, despite the Federal Reserve's insistence that the uptick in inflation is transient.
How will the Fed respond to the dramatic inflation report? There seems to be some split in opinion within the Fed, which means that the market will be monitoring every Fed utterance with a fine-tooth comb. Fed member Robert Kaplan made headlines recently when he publicly called on the Fed to have a discussion about tapering, warning that there were "excesses and imbalances" in the economy and that the recovery was taking place faster than anticipated.
The opposite stance was expressed by Fed member Lael Bainbaird, just one day before the bombshell inflation report. Brainard argued that inflation risks are a "transitory surge" and urged the Fed to remain patient and continue its ultra-dovish monetary policy. She pointed to the weak nonfarm payrolls report last week as an indication that the US recovery still has a ways to go, saying that, "today, by any measure, employment remains far from our goals.”
Any hint by the Fed that it could tighten policy by reducing its QE purchases would be bullish for the US dollar. This means that comments from Fed policymakers in the coming days and weeks could have a significant impact on the direction of the US dollar.
NZD/USD faces resistance at 0.7350. Above, there is resistance at 0.7417. There is support at 0.7166 and 0.7049
Uscpi
Pound flat after GDP data, US CPI nextThe pound is showing limited movement in the Wednesday session. In European trade, GBP/USD is trading at 1.4132, down 0.07%. On the fundamental front, US CPI is projected to come in at 3.6% year-on-year in April, up from 2.6% in March. If CPI outperforms, it could raise expectations that the Fed will move sooner to tighten policy.
UK GDP numbers were a mixed bag, as the economy contracted in the first quarter of 2o21. At the same time, The monthly GDP outperformed.
Analysts had expected the British economy to shrink in Q1, and this was the case, with a GDP read of -1.5%. This was slightly better than the forecast of -1.7%, but pointed to a bruising quarter, as the economy was hampered by lockdown restrictions and trade disruptions due to Brexit, such as the buildup of containers in British ports.
The GDP report was also a "cup half full", as March GDP was stronger than expected, with a healthy gain of 2.1%. This easily beat the estimate of 1.3% and was well up from the February reading of 0.4%. The March expansion reflected businesses preparing for the first stage of the reopening of the economy, which occurred in early April.
There was more positive news from the manufacturing front, as Manufacturing Production rose 2.1% in March, up from 1.3% and easily beating the forecast of 1.0%.
The British economy is still some 8.7% smaller than prior to the Covid pandemic, but the March reading is an indication that the economy is headed in the right direction, and that bodes well for the British pound, which has been on an impressive streak. GPB/USD is up 1.13% this week and has soared in May, with gains of 2.34%.
The pound avoided a potential pitfall early in the week, as the results of the Scottish election showed that the pro-independence SNP failed to garner a majority in parliament. This means that investors can count on political stability, and the pound responded with gains of close to one per cent on Monday.
GBP/USD continues to test resistance at 1.4137, followed by resistance at 1.4269. There are support lines at 1.3859 and 1.3727.
Red-hot pound punches past 1.41, GDP nextThe pound is in positive territory on Tuesday. In the European session, GBP/USD is trading at 1.4144, up 0.20%.
The Scottish National Party (SNP) handily won the Scottish election, but investors sighed with relief as the pro-independence party came up just short of a majority. This means that plans for another referendum on Scottish independence may be delayed, which should ensure political stability for the time being. The pound responded with huge gains of close to 1.0% on Monday.
The British government has given the green light for a further easing of health restrictions, as of May 17. The positive news on the Covid front has also been bullish for the streaking pound.
Attention has shifted to UK GDP for the first quarter, which will be released on Wednesday (6:00 GMT). The market is bracing for a contraction in GDP. This would reflect the lockdown that was in effect for much of the first quarter and had a chilling effect on economic activity. The consensus stands at -1.6% (MoM) and -6.1% (YoY).
Inflation concerns have been dominating the financial markets, sending equities lower and boosting the safe-haven US dollar. The US and China, the world's two biggest economies and both showing signs of rising inflationary pressures, which is causing jitters for investors.
In China, PPI climbed 6.8% (YoY), above the 6.5% forecast and up sharply from 4.4% in March. The US releases April inflation numbers on Wednesday. The consensus stands at 2.3% for Core CPI (YoY), compared to 1.6% in March. If Core CPI matches or exceeds the estimate, investors may be of the opinion that the Fed may have to tighten policy sooner rather than later, which would be bullish for the US dollar.
GBP/USD is testing resistance at 1.4137, followed by resistance at 1.4269. There are support lines at 1.3859 and 1.3727