EUR/USD rally continues on poor US eco data

On Wednesday, recent trends on global markets continued. Stocks and bonds were under pressure. The euro currently profits more from this context than the dollar. Remarkably, the rise of EUR/USD occurs even as short-term yields differentials move in favour of the dollar. Longer term interest rate differentials are in favour the euro, but usually they are seen as less important for currency trading. A poor ADP report brought additional headwinds for the dollar. EUR/USD jumped to a new correction top north of 1.13. The decline of USD/JPY remains more moderate. The pair closed the session at 119.46.

This morning, Asian equities are in risk-off modus with losses broad-based across the region. Comments from Fed’s Yellen that valuations of bond and equity markets are generally quite high might weigh on Asian markets, too. The dollar remains in the defensive, close to the recent lows, but there are no additional losses compared to yesterday’s closing levels. USD/JPY and EUR/USD are respectively trading at 119.45 and 1.1345. Fed’s Lockhart yesterday indicated that he still sees a good chance for a mid-year rate hike. Market expectations for a September increase are “reasonable”. For now his view didn’t help the dollar much.

Dollar to stay in the defensive ahead of the payrolls

Later today, the calendar is thin. Except for this morning’s German factor orders there are only second tier eco data in Europe. In the US, the jobless claims are interesting but the market reaction, if any, will be muted ahead of tomorrow’s US payrolls. Is the thin calendar a precursor for calm trading on global (currency) markets? This is far from sure. Recent moves in interest rates have been violent, but there is no obvious reason why the trend should halt today. After the poor ADP report, investors will probably stay cautious on the dollar ahead of tomorrow’s key payrolls report. The ECB raising the Greek ELA facility might be a slight additional supportive for the euro.

Of late the risk-off sentiment in combination with higher core bond yields did hurt the dollar more than the euro. The underperformance of European equity markets and the widening in peripheral spreads still didn’t stop the euro rebound. Neither did the lingering uncertainty on Greece. This pattern probably won’t last for long. However, for now the euro is in the drivers’ seat and the dollar remains vulnerable due to unconvincing US eco data with EUR/USD setting a new correction top north of 1.13. We continue to look for a signal that the EUR/USD rebound ran its course. For now that signal isn’t available yet. We don’t fight the daily momentum, especially not one day before the key US payrolls report.

Last week, 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. 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. Tomorrow’s payrolls will probably decide on the next directional move of the dollar. For now, we are more neutral on the USD in a MT perspective. The dollar needs better news for a sustained comeback, but for now US data fail to convince. As usual, Greece remains a wildcard. ECB QE and the negative deposit rate remain a structural negative for the euro and might still play their role further down the road.

Sterling heading in the election storm

On Wednesday, sterling investors understandably were in wait-and-see modus just one day ahead of the UK parliamentary elections. Contrary to the manufacturing and construction PMI, the UK services PMI was better than expected at a strong 59.5. the report gave sterling temporary some support. EUR/GBP dropped from the 0.7420 area to the 0.7370/75 area. Part of this move was also due to a temporary setback of the euro at that time. However, the poor US ADP report pushed EUR/USD, cable and EUR/GBP higher. EUR/GBP closed the session at 0.7442. Cable ended the day at 1.5246 from 1.5182, a reasonably constructive performance of sterling ahead of the elections, admittedly against a very weak dollar.

Today, there are no real important data on the agenda in the UK. So all eyes will be on the UK elections. The vote will be a close call and the formation of a new coalition government might be difficult. This is a negative for sterling short-term. Euro strength remains a factor for EUR/GBP trading, too.

Until last Friday, EUR/GBP traded sideways in the 0.7150/0.7400 area. The negative impact of election uncertainty on sterling was not that big of late. However, the poor UK manufacturing PMI last week eroded sentiment on sterling. Euro strength yesterday propelled sterling out of the recent trading range. That said, we are not convinced that an ‘unconventional’ outcome of the elections should be a long term negative for sterling, as long as the economic recovery remains on track. A flaring up of the debate on the UK’s EU membership at the government coalition talks would be sterling negative.