EUR/USD entering calmer waters?

USD looking for a bottom?

On Friday, the EUR/USD correction/short squeeze initially continued even as activity in Europe was subdued due to the labour day holiday. The US manufacturing ISM was slightly weaker than expected. The dollar lost a few more ticks upon the publication of the ISM. EUR/USD set a correction top in the 1.1290 area, but there were no follow-through losses for the USD. On the contrary, US bond yields rose after the ISM, probably supported by hawkish comments from Fed Mester. EUR/USD closed the session at 1.1199, from 1.1224. USD/JPY ended the week at 120.15 (from 119.38).

This morning, the HSBC China manufacturing PMI was revised lower from a preliminary reading of 49.2 to 48.9, signalling an ongoing loss of momentum in the sector. The report is reinforcing market expectations that Chinese authorities will be obliged to support the economy. The yuan is trading slightly weaker at USD/CNY 6.2085/092 at the moment of writing. Chinese (and most other Asian equities) show moderate gains. Japanese markets are closed for the Golden week holidays. In thin market conditions, USD/JPY is changing hands just north of the 120.00 big figure. EUR/USD trades in the 1.1190 area.

EUR/USD entering calmer waters?

Today, the calendar is moderately interesting. In the EMU, the final manufacturing PMI’s will be published. The EMU preliminary figure was reported at a disappointing 51.9. A slight downward revision is possible. The revision of the EMU PMI’s might be a slightly negative for the euro, but we don’t expect it to be a big issue of EUR/USD trading. In the US, the factory orders will be published. A rise of 0.2% to 2.2% is expected. The report is usually no trendsetter for markets. Markets will keep an eye at comments from Fed governors Evans (expected dovish) and Williams (expected hawkish already spoke last Friday). On Friday, Fed Mester and Williams both suggested that a June rate hike was not yet completely off the table as there are still two sets of important eco data coming before that meeting. Also keep an eye at core bond yields. Last week, the rise in core/European bond yields supported the euro more than the dollar. However, in a context where the Fed is expected to raise rates in a not that distant future, higher core bond yields at some point might again turn in favour of the dollar. In a day-to-day perspective we expect a calm start of the new trading week. We look out for signs of a bottoming out process on then recent USD correction.

Last week, the dollar was on the defensive especially against the euro. Investors reduced USD long positions as they anticipated a poor US Q1 GDP report and a soft Fed assessment. The prepositioning was justified by the facts. EUR/USD broke above the 1.1052/(98) resistance area. From technical point of view, this is an important warning signal for dollar longs. The trade-weighted dollar dropped also below the high profile 96.17 support level, painting a multiple top configuration on the charts. So, the technical picture for the dollar clearly deteriorated. For EUR/USD, 1.1534 (early February top) is the next high profile reference on the charts). Even as the MT technical picture turned less USD positive, we don’t have the impression that the dollar is ripe for a sustained new down-leg. Friday’s payrolls will be the next important point of reference for USD-trading. We turn more neutral on the USD in a MT perspective. The dollar needs better data for a sustained comeback. We look out whether this week’s data give already tentative signs of such an improvement. As usual, Greece remains a wildcard. ECB QE and he negative deposit rate remain a structural cap on the upside potential of the euro, too.

GBP sterling hammered after poor UK manf. PMI

On Friday, sterling was hit hard as the UK manufacturing PMI missed the consensus by quite a big margin. The index declined from 54 to 51.9, while an increase to 54.6 was expected. The report triggered an ongoing decline of sterling that lasted throughout the whole UK trading session. Sterling reversed its weekly gains against the dollar and extensively tested the 0.7385/0.74 resistance area against the euro. EUR/GBP closed the session at 0.7393 (from 0.7310). Cable ended the session at 1.5148 (from 1.5351).

Today, UK markets are closed in observance of the May Day holiday. Later this week, all eyes will be on the UK elections. After the disappointing manufacturing PMI however, also the services PMI (to be published on Wednesday) will be important.

Until last Friday , EUR/GBP was locked in a sideways range in the 0.7150/0.7400 area. The negative impact of election uncertainty on sterling even eased of late. However, the poor manufacturing PMI spoiled the game for the UK currency.
This week, uncertainty on the outcome of the elections and on the eco data will probably keep sterling in the defensive. That said, we are not convinced that an ‘unconventional’ outcome of the elections and coalition government should be a long term negative for sterling, as long as the economic recovery remains on track. However, further volatility/sterling losses might be on the card in the run-up to the election.