Arne Lohmann Rasmussen
Danske Bank A/S
EUR/USD continues to trade sideways around the 1.38 level and it appears that range trading will remain the name of the game for a period of time. The next trigger event for a break out of the range is likely to come from a re-pricing of one of the two central banks.
Following a fairly strong recovery of US data over the past weeks, the FOMC meeting next week will probably not provide any new information and the Fed will likely continue its tapering path. While this admittedly brings us a small step closer to a rate hike in the US, it seems to be too early for markets to price in further hikes.
In respect of the ECB, the latest comments from various ECB members suggest that some ECB easing could be in the pipeline as the central bank seems to be concerned about deflation and the deflationary impact of the currency. However, given the current pricing in the European money market we probably have to see actual ECB easing in order for the curve to flatten further and the euro to weaken.
Today, the PMI releases will be in focus. We expect US Markit PMI to increase slightly, while our economists forecast euro-zone manufacturing PMI to decline slightly to 52.5 from 53.0, suggesting that risks might be skewed to the downside for EUR/USD today. Notably a decline in European PMIs indicating that sentiment has peaked for now could force the ECB to react soon.
The tensions in Ukraine continue and the US has said it plans to send 600 troops for exercise in eastern Europe to reassure allies on Russia’s border. The plans were announced after Ukraine accused pro-Russian separatists of torturing and killing two people and of shooting at one of its military planes. Renewed pressure on RUB may come back any moment on geopolitical woes and the risk of negative sentiment once again spreading to other EM markets should not be ignored.
In Australia consumer price inflation was weaker than expected in Q1 and the Australian dollar fell to a two-week low at 92.80 . Strong support for AUD/USD is seen at 92.54. This level might attract new buyers as it seems that the sentiment towards “China exposure” has improved slightly after the Markit/HSBC manufacturing PMI improved slightly to 48.3 in April.
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