FX Daily Strategy: Europe, Jun 26th

We expect an advance May goods trade deficit of $87.8bn, up from $83.0bn in April and the widest deficit since December. We expect exports and imports to both show strong gains, rising by 4.0% and 4.5% respectively. Even if exports and imports saw the same gain in percentage terms, the deficit would increase due to imports exceeding exports in USD terms. Import prices increased by 1.9% in May, ahead of a 1.3% rise in export prices. This implies similar gains in volumes for both imports and exports, of 2.6% and 2.7% respectively, resuming a recent strong trend after April data saw little change. Boeing data suggests strength in aircraft exports.

Tokyo CPI will be released on Friday Asia morning. It is expected all three items to be below 2% as energy stimulus continues to put a lid on inflation artificially. However, we believe there is a chance for ex fresh food and energy to reach 2% if consumption rebound on real wage gaining more traction. Else, it is likely to see CPI remain depressed before stimulus expiring in September. Indeed, Tokyo CPI remains capped by 2% with ex fresh food & energy at 1.9% y/y. Headline CPI for June arrived at 1.7% y/y while ex fresh food rose 1.6% y/y. It seems to suggest underlying inflation is gathering momentum with consumption recovery and energy cost being spread among business. 

On the chart, the pair is little changed, as prices extend consolidation below the 161.93 fresh year high. However, pressure remains on the upside and see potential to extend bullish gains from the 155.00 May low. Break above the 161.95 multi-year high of July 2024 to will extend the underlying bull trend and see room towards 163.00/164.00 congestion area and high of December 1986. Meanwhile, support is raised to the 161.00/160.72 area which should underpin. Would take break here to ease the upside pressure and open up room for deeper corrective pullback to 160.00/159.53 support.