EUR extends gains as selling pressures on GBP mount

EURUSD rally extends

EURUSD extends gains to 1.1270 in a clear short-term dip-buying pattern. As the positive momentum strengthens, the trend followers are increasingly tempted to surf the bull-trend and cash-in rapid short-term profit. In fact, given the heavily negative speculative positioning in the market, there is potential for sizeable short-covering and a rebound to 1.1500/50 is not a delusion. This week’s sell-off in German bunds and DAX will certainly attract fresh inflows and sustain the single currency. The major risk here is the burst of this EURUSD ‘bubble’ which may happen any time given that the fundamental direction remains comfortably bearish.

Count-down to UK election

As suspected, the pre-FOMC gains are being trimmed as pre-election GBP-shorts take over the market. The political uncertainties are finally translating into a weaker pound versus USD and EUR. GBPUSD tests 1.5345 (top on April 13/17 Fibonacci projection over April 21/27) to confirm the short-term bearish reversal and favour an extension to 1.5080/1.51 (Fib 50%). EURGBP firmly moves towards 0.73935/0.7450 resistance (Fibonacci 38.2% on Dec’14 – Mar’ 15 drop / 100-dma). Traders chase dip-buying opportunities above 0.7230/50 (area including 21, 50-dma and Fibonacci 23.6%).

Some colour out of Japan

The Japanese national CPI ex-fresh food accelerated 2.2%, versus 2.0% expected & last. The JPY-complex was better bid in Tokyo as fastening consumer prices revived some hope in favour of Abenomics – which is suffering an important decline in popularity among both domestic and foreign investors. A higher inflation cannot be a goal per se; the fiscal and structural dimensions of Abenomics should be taken care of, otherwise the three-arrow Abenomics is nothing but a simply massive cash injection in the economy. The pending fiscal and structural uncertainties act as important barrier to the upside potential in USDJPY.

This being said, the USDJPY bias remains on the buy-side along with the pension funds’ demand supportive of the market above 118.10/50 support. There is a potential to 120.60/121.10. Strong resistance should be a strong barrier at 122.03 (Mar 10th high).

EURJPY tests the 100-dma (134.73). The positive momentum strengthens as the pair trades above the daily Ichimoku cloud (130.68/132.85) for the first time in 2015. A strong technical resistance is eyed at 135.15 / 137.41 (Fibonacci 38.2% on Dec’14 – Apr’15 drop / 200-dma).

The downside correction in AUDJPY is underway after bumping into the 200-dma (95.571) offers. The expectations of a 25 basis point RBA rate cut on May 5th meeting should reinforce downside pressures on the Aussie leg and pull the pair back to 93.10 support.

Bumpy upside for the USD

Except against the euro, the US dollar timidly pared losses as the FOMC sounded less dovish than broadly priced in by the market on Wednesday. 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.