Appetite in EUR and GBP diverges post-FOMC

EUR-bulls in charge

An aggressive EURUSD rally ruled the European open. The market is still thirsty for higher EURUSD, even after the less dovish FOMC rhetoric in April 28/19th meeting. As the positive momentum strengthens, the trend followers are tempted to jump on the bull-trend and to push the EURUSD upwards. In fact, given the heavily negative speculative positioning in the market, there is potential for a rebound to 1.1500/50 before next Friday’s NFP read in the US. The 1-month EURUSD risk reversals stand at three month highs, meaning a greater need for upside protection as expectations on Fed’s June tightening are now completely vanished. This being said, there is always a good surprise potential in NFP prints. The key risk of a better USD optimism is the burst of the EURUSD ‘bubble’ on divergence between the ECB and the Fed’s policy outlook.

The euro rally has been a good push for the EURCHF to 1.05, the level which has once been perceived as an implicit downside limit for the SNB’s tolerance for the franc appreciation against euro. Technically, the upside move has potential to 1.0525/95. Above this zone, the upside remains challenging as the real money and retail names maintain their long bias in franc. There needs to be more than a knee-jerk EUR rally to convince them to switch to the opposite camp.

GBP-bulls to face UK idiosyncratic risks before May 7

The positive shift of the entire Gilt curve tip off the rising tensions before May 7 general election. Now that the jitters around the FOMC are fading, the UK’s idiosyncratic uncertainties should finally translate into a weaker pound. Negative pressures on the pound complex are on the menu as we are stepping into the critical one-week count down period. With waning upside potential, 1.5500/55 area should stand as good supply. We look for a break below 1.5345 (top on April 13/17 Fibonacci projection over April 21/27) to signal a short-term bearish reversal.

EURGBP has now entered the bullish consolidation zone; the MACD has stepped above the zero-line. The cross will get the support of vanilla calls above 0.7250 today, vanilla puts trail below 0.72. A positive extension should face critical resistance at 0.73935/0.7450.

The Fed is confident but data is important

"Although growth in output and unemployment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace" said the FOMC. As the policy tightening will only kick-off after the Fed is "reasonably confident" that the inflation is on its path to 2% goal and the slack in the labour market narrows, the attention now shifts to next week's NFP read. A second consecutive monthly release below 200K could further damage the expectations that the Fed will start the policy tightening before the end of this year. In this context, the post-FOMC recovery in the USD will certainly be bumpy.

Big names release results today: RBS, Royal Dutch Shell, IAG (UK), BNP Paribas, Air France-KLM, Deutsche Boerse, AXA (EU), Holcim, Swiss Re (Switzerland), Colgate-Palmolive, Exxon, Coca-Cola, AIG (US). European markets have softened again on the open following yesterday’s falls.