The news that IMF managing director Dominique Strauss-Kahn was arrested and detained on rape charges in New York on Saturday muted risk sentiment and sent the euro down to a seven-week low versus the US dollar on Monday.

The IMF chief’s arrest spurred a degree of uncertainty at a critical moment in the eurozone sovereign debt crisis, as Strauss-Kahn was expected to attend a meeting of eurozone finance ministers on Monday, where the terms of Portugal’s aid package were discussed and finalised.

The single currency opened lower on Monday, as it continued its decline versus the dollar from Friday. The dollar was up sharply across the board as it approached Friday’s close. The rise of the dollar was being attributed to the heightened anxiety over the outcome of Monday’s meeting of eurozone finance ministers and to data from the US that showed core CPI for April rose in line with consensus, supporting the view that the Fed will almost certainly end QE2 on schedule in June.

The University of Michigan consumer sentiment data was also published on Friday, beating expectations and also contributed to the dollar’s rise.

The euro took a breather on Monday afternoon and early on Tuesday after a rescue package for Portugal, worth €78 billion, was approved. It also benefitted from a successful Spanish bond auction and return to neutrality in risk appetite on stronger UK inflation data and hawkish RBA minutes. However, the single currency still hovered close to its seven-week low against the greenback as Forex investors see a further rise to be limited.

Concerns about the eurozone periphery were keeping the euro volatile and although the news about an agreement on Portugal was seen as positive, investors appear to be more interested on a deal concerning Greece.

Meanwhile, on Tuesday, we saw the first official use of the word “restructuring” and also the first admission by any official from the EU, IMF and/or ECB that the Greek debt burden is unsustainable. Eurogroup chairman Jean Claude Juncker said that a “a soft restructuring” of Greece is needed, but there still appears to be a lack of consensus among eurozone leaders on what to do about Greece.

Forex traders expect the EUR/USD to be under further downside pressure as long as it remains below its 55-day moving average currently at 1.4283. The single currency had reached a 17-month peak earlier this month versus the greenback at 1.4940, driven by expectations that the ECB would hike their rates further in the coming months, in comparison to the Fed’s more dovish stance.

Since then the euro dropped, as a sharp decline in commodities, in particular silver (which is down almost 30 per cent so far this month), led investors to cut their dollar-funded bets on riskier assets.

The dollar is up across the board so far in the month of May, up more than 4.50 per cent versus the euro, three per cent against sterling, almost 2.50 per cent versus the Swiss franc and by an average of 3.50 per cent against the commodity bloc currencies (AUD, NZD, and CAD).

For the pair EUR/USD, the RTFX trend is currently bearish starting from 1.4156, while the RTFX Trader Tip’s weekly scenario suggests it may drop as far as 1.3967, before correcting towards 1.4274.

Sterling was mixed at the start of the week but received a boost higher on Tuesday on stronger than expected inflation data. The UK headline CPI was higher in April, up to an annual rate of 4.5 per cent versus consensus for a marginal increase to 4.1 per cent. This was the highest reading in inflation since October 2008.

Initially sterling surged higher but it soon pared most of its gains as forex markets seemed to have been well prepared for a high CPI reading. Nevertheless, the cable is still higher versus the greenback, almost 0.20 per cent on the week, but is down against the single currency and Swiss franc, by quarter of a per cent and half a per cent respectively.

The RTFX TraderTip suggests support for the pair EUR/GBP should hold at 0.8693 – 0.8651 for a correction up to 0.8795 and warns of an “imminent end of bearish move” for the current week.

The Japanese yen has been under pressure so far this week on talks of merger and acquisitions flows. Hawkish minutes from the Royal Bank of Australia’s last policy meeting also lifted higher-yielding currencies versus the Japanese currency.

By the time of writing, the yen was down an average of 0.70 per cent against its major counterparties on the week. Most notably it was down 1.50 per cent against the franc, 1.05 per cent versus the euro and 0.80 per cent against the dollar.

Upcoming FX key events:
Today: UK Retail Sales, US Existing Home Sales and Philadelphia Fed Business Index.
Tomorrow: German PPI, Canadian CPI and Canadian Retail Sales.

FX technical key points:
EUR/USD is bearish, target 1.3950, key reversal point 1.4300.
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.

Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Xuereb is a trader at RTFX Ltd.

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