A more constructive economic picture aided by cleaner market positioning has helped the USD recover somewhat over the past week.
Although the FOMC minutes did talk down the potential of a near-term rate hike, the minutes also underscored the Fed’s belief that much of the softness in the early part of the year was transitory.
Indeed, the strengthening trend can be seen in the service side of the economy (housing data have been especially strong), whereas sectors exposed to USD and weak external demand have been comparatively tepid (e.g., manufacturing).
This dynamic, according to Barclays research notes, is likely to continue if, “as we expect, the USD strengthens and the tightening in interest rates proceeds at a gradual pace. Indeed, the more the market believes interest rate tightening will be gradual as the economy recovers, the greater are the upside risks to activity/inflation in non-tradable sectors of the economy and higher interest rates will be needed in the future, raising the USD’s value today.”
Durable goods and new home sales data on Tuesday may shed additional light on this dynamic further. We expect a below consensus print for durable goods ex-transportation (0.3% m/m vs. c.f. 0.4%) and an above consensus print for new home sales (510k vs. c.f. 481k).
“We also expect a positive surprise on pending home sales on Thursday with these growing 3% m/m (c.f. 0.9% m/m). Business and consumer sentiment indicators are expected to show improvement over the previous readings – Chicago PMI to rise to 53.0 from 52.3 (c.f. 53.0) and Michigan consumer sentiment at 90.0 from the 88.6 preliminary reading (c.f. 90.0). Finally, we will get the second estimate for Q1 GDP – we expect a downward revision to -1.1% q/q saar (c.f. -0.9%).”
The material has been provided by InstaForex Company – www.instaforex.com