USD stronger, helped by oil price drop and soft German unemployment data. Key EURUSD trendline support now in focus.

EURUSD prepping for a run toward 1.5000? Market's risk appetite remains high, keeping JPY on the weak side.

MAJOR HEADLINES – PREVIOUS SESSION

• UK May GfK Consumer Confidence out at -29 vs. -25 expected
• Japan May Nomura/JMMA Manufacturing PMI out at 47.7 vs. 48.6 in Apr.
• Japan Apr. Jobless Rate rose to 4.0% vs. 3.9% expected and 3.8% in Mar.
• Japan Apr. Household Spending fell -2.7% vs. -0.9% expected
• Japan May Tokyo CPI rose 0.9% YoY vs. 0.8% expected.
• Japan Apr. CPI rose 0.8% YoY vs. 1.0% expected, while ex Fresh Food/Oil fell -0.1% vs. 0.0% expected
• Japan Apr. Industrial Production fell -0.3% MoM vs. -0.5% expected
• Japan Apr. Housing Starts fell -9.7% YoY vs. -11.7% expected
• Japan Apr. Construction Orders fell -8.4%

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Germany Apr. Retail Sales (0600)
• France Apr. Producer Prices (0645)
• Switzerland SNB's Roth to speak (0700)
• Sweden Q1 GDP (0730)
• EuroZone ECB's Weber to Speak (0830)
• EuroZone May CPI Estimate (0900)
• Switzerland May KOF Swiss Indicator (0930)
• US Apr. Personal Income and Spending (1230)
• US Apr. PCE Deflator/Core (1230)
• Canada Mar. GDP (1230)
• Canada Apr. Industrial Product Price/Raw Materials Index (1230)
• EuroZone ECB's Stark to speak (1300)
• US May Chicago PMI (1345)
• US May Final University of Michigan Confidence (1400)

Market Comments

The oil market was firmly in focus yesterday, as the weekly US inventory data showed an alarming 8.8 million barrel draw on inventory, and gasoline supplies, already declining toward low levels, also registered a sharp drop. The reaction to the data on the oil market makes us believe that the oil threat to the USD may be over for now, as a 4-dollar spike higher up to 133/barrel after the data release was wiped away and the price plummeted 7 dollars toward 126 overnight. Whenever a market rejects a very strong fundamental input with a price move in the opposite direction that the input would seem to indicate, you have a reasonable sign that the divergence is a red flag for where the market wants to go. This is much like global markets' reaction to the Bear Stearns rescue in March - the most dramatic bad news to date was actually what coincided with the huge subsequent rally in risk appetite.

This move in oil markets could lead one to pin the reason for the USD rise yesterday firmly on the drop in oil prices. While the oil drop is very important for the overall USD picture, the hour by hour action yesterday seemed to show an underlying USD strength that was well under way before the wild ride in oil unleashed by the inventory data.

One key for the USD strength was signs of EuroZone weakness in the form of an uptick in the German unemployment, the first in over two years. We're still a bit uncomfortable with the degree of risk appetite in the market and whether the USD is rallying on optimism about the US economy (which we do not share in the long run), but the market couldn't care less what we think and always tells the truth. And the market action suggests that this USD rally may have some medium term legs that could take it to 1.5000 against the EUR (see chart below for more.).

Elsewhere, it's hard to believe the commodity currencies haven't taken a severe drubbing on the kinds of falls we've seen in precious metals, copper and of course oil lately. As we mentioned at least once in the last few days, supposedly the market is focusing more on their status as "global growth currencies" correlated with risk appetite rather than strictly commodity currencies as such. CAD is a study in resilience, for example, considering the headwinds from the drop in oil. NOK has held up surprisingly well - though we wonder if that is sustainable if oil continues to fall, considering the decelerating economic backdrop in Norway. The EURNOK resistance area at 7.90/5 is a key one for the technical view there.

The news out of the UK has been mixed. The good news: the May CBI survey was marginally less bad than expected and an improvement on the April numbers, and the June expectations are rather positive. The bad news: further signs of house price weakness and the Consumer Confidence survey out overnight was far worse than expected and represents another 15-year low. Yet, GBP is rallying - most likely on EUR weakness and robust risk appetite. Key support gave way yesterday in EURGBP, and the consolidation may continue lower toward the next support around 0.7750. We still wonder if GBPUSD is toppish regardless of GBP strength elsewhere.

Chart: EURUSD
All eyes on the big rising trendline from February that was grazed yesterday with the brief move below 1.5500. If that trendline gives way, the next support comes in at 1.5287 and then a big gap opens up toward the flatline support just below 1.5000 at 1.4966. That last level is also the exact 0.618 retracement level for the move from the December low at 1.4311 to the high this year at 1.6020. First key short term resistance comes in at 1.5610.