The EUR/USD’s break out from the channel rising from February 9 highs and February 14 lows opens the door for possible deeper dips. The pair EUR/USD is currently trading at 1.4357 at the time of writing.
The recent strength of the euro against the USD stalled just shy of 1.5000 levels (the last highs reached were of 1.4940 on May 4), at the peak of these highs USD outlook was extremely negative and the ECB’s April 7 rate hike (of 25bp) also fed support into the single currency.
Focus on the United States’ debt coupled with the Federal Reserve’s “no rush” stance when it comes to rate hikes had tilted the balance in favour of the euro, when seen against the USD. The euro remained strong until the May ECB rate decision, where policy makers opted to stay on hold. This timeout disappointed the most hawkish speculators that were hoping that the ECB might be raising rates again, as early as next month – the issue revolved around the timing of these hikes.
ECB President Jean Claude Trichet’s no mention of his trademark “strong vigilance” phrase implied that although rate hikes remained on the cards, another June rate hike was probably too optimistic.
In the near term the United States will be concluding its second round of quantitative easing, and even though US economic growth was not as strong as one would have hoped, various speakers from the Fed have acknowledged at least a moderate improvement in the rate of economic growth, although still signalling that the growth of the US Labour market remained disappointing. The termination of QE2 and a general overall improvement could favour some short term USD strength, although fundamentally the persistence of the US’s deficit should still cap a USD recovery.
In the meantime the re-surfacing of Greek problems also dragged the euro lower. Last Friday the resurfacing of Greece concerns climaxed in German newspaper reports, that Greece was assessing the possibilities of withdrawing from the eurozone, during an unscheduled meeting of European officials.
The meeting did in fact take place but such rumours were denied. The Greek Finance Ministry explained that talks revolved around what would be the outcome when Greece would return to tap the markets in 2012. Greece was dealt a further blow on Monday of this week, when Standard & Poor’s downgraded Greece from BB- to B on the risk of debt restructuring.
In the near term the next possible levels for the EUR/USD are 1.4157 and 1.4062, the deepest April troughs for the currency pair. How low we may go from here depends if the EUR/USD currency pair manages to rebound back within the rising channel (rising from February 9 highs and February 14 lows) by breaking again the 1.4500-1.4560 region.
Earlier this week data from the UK showed that UK house prices moved 1.4 percent lower, falling short of expectations. So far this week the GBP/USD has traded in the range of between 1.6270 and 1.6420.
The pair inched lower by a marginal 0.18 percent but on the whole remained fairly neutral for the former part of the week.
For the current week we see the GBP/USD currency pair having a bearish potential but should be supported by 1.6256, while below 1.6497 - 1.6568 – a later recovery up to 1.6568 or 1.6639 is expected. Support lies in the 1.6114 - 1.6256 region while resistance lies in the 1.6639 - 1.6881.
The EUR/GBP traded in the range of 0.8720 - 0.8817 in the earlier part of the week. For the current week we think it is likely that the pair rises to 0.8948 - 0.9142 to correct soon after. Support for the currency pair lies in the 0.8554 - 0.8654 region while to the upside resistance lies in the 0.8948 - 0.9142 region.
Yesterday the British pound had to face the BoE’s quarterly inflation report and is likely to have had to deal with more BoE dovishness given the recent economic data.
Early Tuesday morning Australia and China reported unexpectedly strong trade surpluses. China reported an $11.42 billion trade surplus and Australia reported an AUD 1.740 billion trade surplus, both readings came in well above expected levels.
Upcoming FX key events:
Today: UK Industrial & Manufacturing Production, EZ industrial Production, and US Retail Sales & PPI.
Tomorrow: EZ GDP Preliminary, US CPI & Michigan Consumer sentiment.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is bullish, target 0.9150, key reversal point 0.8600.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8500, key reversal point 0.9400.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is a senior trader at RTFX Ltd.