Is this the end of the rally?

The day started out quietly with limited trading action during the Asian session. The last employment report from Australia didn’t rock the boat as it came in line with market expectations. In March, the unemployment rate stabilised at 5% as the employment change increased by 25.7k, beating expectations of 15k, while previous month’s figure was upwardly revised to 10.7k. AUD/USD appreciated temporarily and tumbled on the $0.72 threshold before easing to around 0.7170.

However, it didn’t take long before the party begins. The publication of weak manufacturing data sent the market in full risk-off mode. The single currency took a hit of 60pips and it slid to 1.1250 as Germany manufacturing PMI missed expectations of 45 and printed at 44.5. Services PMI was better than expected though as it came in at 55.6 versus 55 expected. Finally, the composite measure rose to 52.1 from 51.4 in the previous month. Over the last few weeks, the euro was struggling to climb its way back from 1.1184 (low from April 2nd) to 1.1324 (high from April 17th) as investors started to discount arguments for faster growth in the US and anticipated further dovish decision from the Fed.

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Nevertheless, the European Central Bank has also decided to perform a dovish turn and has therefore started to discard any rate rise in the near term. At its latest meeting, the ECB launched fresh round of TLTROs (cheap financing for banks) and downgraded its growth forecast. Lately, the Governing Council is assessing the eventuality of expanding the current stimulus. Against such a backdrop, we estimate that the single currency would struggle to move higher. Indeed, over the last couple of weeks the risk sentiment was excellent and investors rushed to buy risky assets such as equities; however, the euro was barely able to consolidate over that period. We believe that the equity bull-run is about to take a break as investors take profit. This would inevitably trigger a risk-off switch, which would most likely impact the FX market.