FXS: Dollar continues to fight an uphill battle going into the FOMC meeting
After several sessions of thinned trading conditions due to the Easter holidays, market activity will gradually return to normal today. Yesterday’s US session didn’t change the overall picture for EUR/USD trading. The pair is holding within striking distance from the recent highs, but for now there is no trigger for more follow-through gains. This morning, the EUR/USD cross rate is slightly lower compared to yesterday’s intra-day highs. On the financial newswires, there is some ado about comments from ECB’s Trichet in a newspaper interview. Trichet was quoted as saying that the ECB will do its utmost best to prevent higher oil and commodity prices to filter through into other pric-es, but he also said that hasn’t happened yet. On the currency markets, he said that he shared the view that a strong dollar is in the interest of the US. With the dollar at historically low levels on a trade-weighted basis, this quote can be seen as somewhat of an hidden critics on the current US monetary policy and its impact on the currency mar-kets. However, at this stage there is no indication at all that valuation of the euro (or even better the US dollar) will make the ECB to change its policy anytime soon.
Today, the calendar of eco data is again rather thin. There are no high profile data in Europe. In the US, the CS house prices, the Consumer confidence and the Richmond Fed Manufacturing index are on the agenda. We don’t expect these data to change the picture for EUR/USD trading. Traders will probably keep a wait-and-see approach going into the FOMC meeting which will start today (decision tomorrow at 18.30 CET). The market largely expects the Fed to continue its asset purchase programme and not to give any hints on a tightening of policy yet. If so, the Fed message should be no help for the US currency, but it also wouldn’t be a big surprise. So, in this context, one might expect sentiment on risk to remain an important factor for the day-to-day price action in the EUR/USD cross rate even as the broader picture (relative monetary policy stance between the Fed and the ECB) remains EUR/USD supportive. The debate on a potential Greek debt restructuring from time to time might continue to spark some euro nervousness. However, looking at last week’s price action, the impact of this issue on cur-rency trading was limited in time.
Recently, we had a bullish strategy for the EUR/USD cross rate based on the different policy approach between the ECB and the Fed, but we indicated that short term overbought conditions and extreme euro long positioning made the cross rate vulnerable to a short-term correction. Such a correction occurred on Monday last week. EUR/USD dropped temporary below the standing uptrend line since early January and below the 1.4282 November 2010 high. However, Monday’s shake-out was reversed with remarkable ease later last week.
The pair moved temporary north of the 1.4580 area (2010 high), but no sustained break occurred yet. The LT picture remains EUR/USD positive, but we don’t want to add EUR/USD long exposure at the current level. So, we still hope to add/re-buy EUR/USD at lower levels. The pair is again nearing the standing uptrend line since the year low. A drop below this trend (1.4490 today) could be an indication that a new correction might be in store, especially if this would coincide with a correction on the equity markets
Of late, the dollar was fighting an uphill battle and this trading pattern was also visible in the USD/JPY cross rate. The decline slowed last week, but the pair was also unable to profit from an improvement in risk appetite as mirrored in a strong stock market performance. This illustrates overall poor sentiment on the US currency.
At the start of the new week, sentiment on risk looks less buoyant compared to last week. This is no support for the USD/JPY cross rate. The pair has tested recent lows in the 81.60 area this morning.
Of late, USD/JPY corrected off from the 85.53 high. The move was a correction on the sharp decline of the yen early this month, but also mirrored underlying global dollar weakness. We look to pick up the USD/JPY cross rate, but we are waiting for a technical signal that the current correction has run its course. This is not available yet. Given overall fragile sentiment on the US currency a further down-leg toward the 81.00/80.00 area is still very well possible. So, we try to buy at lower levels.
Last week, EUR/GBP mostly tracked the price action in the headline EUR/USD cross rate. Monetary policy and interest rate differentials are still the key factors for EUR/GBP trading.
Today, the CBI total orders/business optimism will be published. We don’t expect this data release to have a lasting impact on sterling trading. Markets will in the first place look out for the first estimate of the UK Q1 GDP. After the shocking contraction of activity in Q4 of last year, a (moderate) rebound is expected. However, of late expectations for the Q1 GDP have been guided lower (The consensus is now at 0.5% Q/Q, which is not really strong after the decline in Q4). If this development would be confirmed, it would support the view of the doves within the MPC. Last, BoE hawk Weale indicated that he was surprised by the weak recovery in Q1 2010.
In line with EUR/USD, we have a LT EUR/GBP bullish view. The ECB’s firmness on interest rates contrasts with the BoE MPC’s attitude of postponing a rate hike despite ongoing sky-high inflation readings. The EUR/GBP interest rate differential increased accordingly and pushed the pair towards the 0.89 level, where some consolidation kicked in. Of late, we hoped that a technical correction in a market that was positioned overly long euro, would give us a chance to (re)enter the market at lower levels e.g. in the 0.8715 to 0.8654 area. Currently this looks very far away. The trend is clearly up, but for now we don’t jump on this rebound. We look out how the 0.8924/42 area (2011 high/Oct 2010 high) fares. A sustained break above that level would further improve the picture in this cross rate. In the recent past, the chances for a UK interest rate hike have clearly declined. In such a context, a correction in this cross rate will in the first place have to come from an broader correction in the single currency.
