EUR/GBP uptrend continues

Euro strength and USD softness persist

On Monday, the euro dropped temporary early in Europe, but the dip was short-lived. The euro even set new highs after German Chancellor Merkel said that the euro is too weak. EUR/USD touched a correction top in the 1.1264 area and closed the day at 1.1237. The dollar also continued a mediocre performance against the majors including the yen even as US equities extended the rebound. USD/JPY closed at 111.30.

Overnight, the terrorist attack in Manchester and articles in the Washington Post on Trump trying to influence the communication of the intelligence services on the links of its campaign with Russia, are dominating the headlines of the financial press. However, the impact on the markets is modest. Asian equities are trading mixed. The yen is trading marginally stronger (USD/JPY 111.00). EUR/USD (1.1250 area) is holding near the recent highs even as negotiations on a solution for the Greek debt involving the IMF, broke down.

Today, the eco calendar heats up with the US & EMU PMI business sentiment and Ifo business survey. EMU business sentiment is expected marginally lower in May (56.7). We see slight downside risks for the PMI's. At the same time, the German IFO might go higher again. The US service and manufacturing PMI's might modestly rebound. US new home sales growth might ease after two strong months. We don't expect today's data to be game changers for euro or USD trading. The dollar might remain vulnerable to negative surprises. We also keep an eye on US equities. Will the rally continue or will some Trump uncertainty resurface. If the equity rebound slows, USD/JPY might drift below the 111 barrier. The impact of the less positive risk sentiment on the euro is a bit ambiguous. A decline in core yields recently weighed more on the dollar than on the euro, but this might change especially if European equities would continue to underperform. So, we look out whether/when the euro rally has run its course. For now, there is no such s signal. We keep a close eye on the EUR/JPY performance.

At the end of last week, we assumed that an easing of the Trump-crisis could slow the decline of the dollar. For now, core yields and the dollar hardly profited from the rebound of equities. The euro (EUR/USD) remains strong going into the June 08 ECB meeting. However, the mediocre performance of USD/JPY also suggests USD softness. We think that the EUR/USD rebound has gone far enough, but it remains dangerous to row against the EUR/USD rally as long as interest rate differentials move (slightly) in favour of the euro. Investors are also cautious to be short euro going into the ECB meeting. For now we don't row against the euro positive tight.

Technical picture.

The USD/JPY rebound ran into resistance two weeks ago. Wednesday's sell-off/re-break below the 112.20 previous top aborted the uptrend and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible. Earlier this month, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north the 1.1023 range top. The correction tops at 1.1300/1.1366 is the next resistance. We think that USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tougher. A return below 1.1023 would indicate that the upside momentum has eased.

EUR/GBP uptrend continues

Yesterday, euro strength was also the dominant factor for EUR/GBP trading. The Merkel comments on a weak euro pushed EUR/GBP further beyond the 0.86 big figure. The pair closed the session at 0.8643. At the same time, sterling also tried to regain ground against an overall weak dollar. The pair returned to the 1.30 area, but Friday's top (1.3040/50 area) just wasn't reached. Some factors weighed also on sterling . The lead of the conservative party over labour in the polls for the Parliamentary election is still big, but declining. The EU rubberstamped its Brexit negotiation position and still wants an agreement on the UK financial commitments first. At least for now, this uncertainty weighs more on the sterling than on the euro.

Overnight, the headlines of the Manchester terrorist attack weighed slightly on sterling, but the impact remains modest. Later today, the UK public finance data and the CBI retail sales data will be published. The CBI data are interesting, especially as retail activity was under pressure in the first quarter. However, the market reaction is often limited. An easing (10 from 38) after strong April data is expected.
Uncertainty in the wake of the Manchester attack and an easing in retail sentiment might keep a soft sterling sentiment in place.

Of late, the positive sterling sentiment faded and euro strength prevailed in EUR/GBP trading. The pair bottomed out with 0.84/0.8330 as a solid bottom. The breach of 0.8509/31 (previous ST tops) improved the technical picture. For now, we stick to the EUR/GBP uptrend even as the euro rebound might slow short-term. Longer term, Brexit remains potentially negative for sterling.

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