At the start of a week which is set to be characterised by key Central Bank meetings and the labour market report from the United States, the US dollar took a breather relinquishing some of its recent gains against the euro and the yen.
The single currency’s only hope to find some support in the near-term is the jobs report from the US
After a quiet start to the week, due to Easter holidays, the Japanese yen and the euro bounced up from their lows after data from the US pointed at a loss in economic momentum. ISM manufacturing data showed factory activity expanded less than expected last month and expectations that the labour market report at the end of the week will show slower job growth in March dampened bets that the Federal Reserve will slow down on its monetary stimulus.
Asian and US shares capped gains and were weighed by concerns that government spending cuts in the US due to the Sequester were starting to take their toll on the economy. Wall Street fell sharply and forex investors favoured safe-haven assets such as the yen, pushing it to a one-month peak against the greenback and to a five-week high versus the euro. The euro gave up its gains against the dollar by the time of writing but remained off its recent lows.
USD/JPY dropped to 92.57 on Tuesday while EUR/JPY hit a trough by 119.14. Despite the recent bout of yen strength, gains were seen limited ahead of a two-day Bank of Japan policy meeting which came to an end today. Forex investors were looking to sell the yen at these relatively higher levels as the BOJ was widely expected to boost its monetary stimulus.
Despite much of the speculation for more easing by Japanese policymakers is already priced in, new Governor Haruhiko Kuroda may surprise markets with more aggressive action, which would potentially send USD/JPY back on a bullish trajectory to test its three and a half year peak of 96.71 hit in mid-March.
Kuroda reiterated on Tuesday that policymakers will use all necessary means available to achieve the Central Bank’s two per cent inflation target while reinforcing expectations for strong monetary stimulus.
The single currency slipped on Tuesday but held steady away from last week’s low against the greenback. PMI data from the eurozone bloc and Europe’s largest economies showed factory activity was still weak despite figures were mostly better than expected. Forex investors remained concerned over the impact of Cyprus’s bailout and the political deadlock in Italy, which remains without a government one month after the elections.
EUR/USD was last seen around 1.2830 after bouncing to 1.2877. Although it held steady away from a four-month trough of 1.2751, a depressed sentiment over the outlook for the single currency could keep it under pressure. Traders were reluctant to point it strongly in any direction ahead of the European Central Bank Governing Council meeting today. ECB President Mario Draghi was expected to strike a dovish tone on monetary policy and could express concern over the outlook for the currency bloc. In this scenario the pair looks well poised to continue on its southward path and test support at 1.2662, November 2012 low. Furthermore, confidence in the European banking system because of the way Cyprus was handled is at a desperate low, and markets are cautious that this may trigger withdrawals from Italian and Spanish banks.
The single currency’s only hope to find some support in the near-term, unless Draghi comes to its rescue, is the jobs report from the US scheduled for tomorrow. Indeed, speculation that growth in the labour market may have slowed the dollar’s rise already, but a lower than expected change in non-farm payrolls reading may curb expectations that the Federal Reserve will start to taper monetary stimulus. In his last post FOMC news conference, Fed chairman Ben Bernanke told reporters that the Central Bank’s record stimulus of $85 billion in bond purchases a month may be revised if the economy continues to improve. Inversely, a better than expected reading would likely pave the way for a surge in dollar strength and push the euro even lower.
The Bank of England is also expected to announce its monetary policy decision on today. The Monetary Policy Committee is widely expected to keep rates at a record low 0.5 per cent and its asset purchases target at £375 billion, although some are eyeing the possibility of an expansion as Britain struggles to avoid a double-dip recession. Interesting to watch will be the vote count, as Governor Mervyn King has found himself on the losing side in the last two votes as he calls for £25 billion more in QE.
Upcoming FX key events
Today: EZ PPI, EZ ECB interest rate decision, BoE interest rate decision and asset purchases target.
Tomorrow: Canadian employment report, US change in non-farm payrolls and US unemployment rate.
Technical key points
EUR/USD is bearish target 1.2660, key reversal point 1.3300.
EUR/GBP is neutral.
USD/JPY is bullish, target 99.0, key reversal point 83.90.
GBP/USD is bearish target 1.45, key reversal point 1.5300.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.