Throughout the current week we had a number of high profile data from China, Europe and the US, among others. Last Tuesday, Chinese flash manufacturing PMI for April slipped to 50.5 from a previous 51.6.
ECB officials led us to believe that the rate cut option is still very much on the cards
In the eurozone, the advanced reading for manufacturing and services PMIs, a health check for the respective sectors, continued to contract. Despite still in contraction, French data was better than expected but German data continued to slip lower. Overall the aggregate EZ figure showed that both the manufacturing and services sector were virtually flat, although manufacturing was marginally lower and services marginally higher.
Looking back at the EUR/USD’s recent price action; throughout the first quarter of 2013 we have seen the US dollar strengthen, helped mostly by expectations that the Fed may be winding back stimulus before the end of the year on the back of generally improving economic data.
Yet, it was not only US dollar strength that pushed the EUR/USD lower to year’s lows of 1.2746 (April 4). Throughout the first quarter of this year the euro concurrently weakened as the positivity of the eurozone’s improved credit conditions gradually started to ebb and concerns of the weaker eurozone data soon got the upper hand.
In April, the EUR/USD bearishness plateaued and at the time of writing the euro is up 1.8 per cent, when seen against the US dollar, as the euro recovered some of the year’s earlier losses.
The EUR/USD has made highs of 1.3202, so far, in April but was up till now unable to regain the 200 pips lost mid last week.
Where do we go from here? Last week, comments made by an ECB board member revived speculation that the ECB could soon be resorting to rate cuts. A number of ECB officials, including Mario Draghi himself, have led us to think that the rate cut option is still very much on the cards, leading investors to speculate that that the ECB may enact a rate cut as early as May or June. With the ECB still having, relatively speaking, room for rate cuts when compared to its US and UK peers for example – it is highly likely that rate cut expectations continue to take the lead. Currency wise it looks like the downside potential for the euro outweigh the upside.
Tomorrow we have some profile data out of the world’s largest economy, the US. Expectations are for first quarter q-q GDP to continue to strengthen and come out at three per cent (annualised).
In the UK, throughout last week, the ILO unemployment rate ticked higher to 7.9 per cent from a previous 7.8 per cent and retail sales for January contracted by -0.7 per cent after registering a growth of 2.1 per cent in the previous month. The limelight this week goes to the UK’s GDP expected today. The UK is in the risk of a triple dip recession, and if there is no improvement we expect pressure for the British pound as bolder government response would likely follow.
The GBP/USD continues along a bullish trend line, visible since March 12 on daily charts. The currency pair’s last attempt lower has so far been stopped at 1.5196, but a clear close below 1.51 levels could open the door for more bearishness. To the contrary if this does not materialise the pair could bounce back towards 1.5480 levels.
In the former part of this week EURGBP has traded in the range of 0.8519-0.8590; for the current week we expect price moves higher to find resistance at 0.8640/0.8705, while price moves lower should be capped at 0.8506/0.8438.
After gold’s 14 per cent decline, in the two trading days between April 12 and 15, the metal than hit lows of $1321.95 – lows last seen in January 2011. So far we see the yellow metal get some relief as it recovers some of the lost ground. Last Monday the price for gold hit $1439.06 but is still far from where it had left.
Violent moves lower seems less likely but if the yellow metal manages to show some signs of consolidation buyers looking for opportunities may pluck up courage to get back in. While it will most likely be unable to reclaim previous levels the metal could attempt $1460/ $1495 levels in the near term.
Upcoming FX key events
Today: UK GDP and US weekly Jobless claims.
Tomorrow: US GDP, PCE and Michigan Consumer Sentiment.
Technical key points
EUR/USD is neutral.
EUR/GBP is bullish, target 0.8650, key reversal point 0.84.
USD/JPY is bullish, target 101.50, key reversal point 90.50.
GBP/USD is bullish, target 1.5480, key reversal 1.51.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Rudolf Muscat is a senior trader at RTFX Ltd.