Key Points
Friday saw some potentially significant price action in global markets.
EUR-USD holds on to the gains seen on Friday, but positional backdrop remains challenging and downside is favoured.
Tone of this week's US data will be critical.
NZD boosted by strong retail sales data.
UK PPI data today's main feature.

Market Outlook
An odd day on Friday, with initial weakness in high risk, high yielding assets and strength in the CHF and the JPY being firmly rejected. News out of China about a relaxation of controls on how much Chinese entities can invest in foreign markets led to many headlines about a wall of money about to hit foreign markets and this contributed to the market rebound. Such outflows are not likely to happen overnight and could be quite limited initially, but the news follows recent noises out of China that their new FX reserve investment agency will be up and running by the end of the year and could conceivably handle $200bn worth of funds. It would seem that the global liquidity machine will keep on running for some time yet and this can only mean one thing - higher global interest rates.

Key now is whether there is any follow-through to Friday's significant price action and in terms of general JPY sentiment whether or not EUR-JPY can advance beyond 163.05 will be significant. As long as it stays below that level, corrective downside risk will remain in place and this is favoured for now. The tone of this week's Japanese data will have a bearing on how this plays out.

EUR-USD has managed to hold on to the gains seen on Friday, although resistance at 1.3565 and 1.3590 needs to break to suggest the introduction of an upside bias in the near-term. However, this could be difficult in the short-term with the latest IMM data still suggesting a challenging positional backdrop for EUR-USD. As of last Tuesday net EUR-USD longs for spec accounts stood at 105,270 contracts, only modestly down from the 106,688 seen the previous week. US data will again be key this week, with housing data and the Fed surveys the main features. The latter will be especially significant in terms of whether they offer support to the picture painted by the recent stronger ISM number. Downside remains favoured on EURUSD.

Another stonking increase in retail sales ( 1.3% m/m in Mar after 2.1% in Feb), but a source of comfort for the RBNZ is that it is still too early to gauge the consumer's reaction to the two rate hikes conducted on Mar 8 and Apr 25. However, if there is no sign of a cooling in this data over the next couple of months the RBNZ may be tempted to take further steps to rein in such exuberance. The NZD rallied on the news but a move above 0.7405 is needed to suggest a fresh test of the recent highs just below 0.7500 and this could prove difficult in the short-term.

Day Ahead
UK - PPI data, especially that relating to core output prices, could have a significant bearing on sentiment about inflation ahead of Wednesday's Inflation Report. The ability of manufacturers to pass on higher costs has been a big concern for the MPC in recent months, fuelling fears about a higher trend for core retail price inflation further down the road. This has been happening against a backdrop of subdued wage growth, which is perhaps doubly worrying. Subdued wage growth is a welcome sight for the MPC, but if output prices are moving higher anyway it begs the question as to what would happen if wage growth was to accelerate. The y/y rate on core output prices is close to multi-year highs and evidence from a variety of business surveys also suggests upward pressure on prices, although the latest CBI price balance did slip back to four month lows (see chart). It will be difficult for the MPC to display any comfort on the outlook for CPI until core output price inflation moves back below 2.5% at the very least - closer to or below 2% would be preferable.

Japan - machinery orders are due tonight and while Q1 GDP will be the most closely watched measure of this week, the trend in the orders data is significant for sentiment about the Japanese economy. Machinery orders have been largely treading water for the past six months or so.

Diary
Data/event BST Consensus*
 
GB PPI input (Apr) m/m 09.30 1.0%
GB PPI output (Apr) m/m 09.30 0.5%
GB PPI output core (Apr) y/y 09.30 2.7%
GB DCLG house prices (Mar) y/y 09.30 12.0%
SE Riksbank's Rosenberg on policy 11.00 
US Fed's Fisher on service sector 21.00 
GB RICS house prices (Apr) 00.30 24%
JP Machinery orders core (Mar) m/m 05.00 1.5%
Latest data Actual Consensus*
NZ Retail sales (Mar) m/m 1.3% -0.2%
JP Domestic CGPI (Apr) y/y 2.2% 1.8%
JP Dom CGPI - final goods (Apr) y/y -0.1% -0.4%R last
JP Current account (Mar, sa) ?2.4trn ?2.1trn
AU Housing finance (Mar) m/m 1.3% 1.5%
CN CPI (Apr) y/y 3.0% 3.1%
ES GDP (Q1) q/q 1.0% 1.0%
* Consensus unless stated