Draghi warns (again) on euro strength

On Friday, the focus for global (currency) trading was on equities as the sell-off in the US spooked investors in Asia and in Europe. Of late, a decline in core bond yields often pressured the dollar against the yen and even against the euro. However, this pattern was less clear on Friday. EUR/USD failed to sustain above 1.39, even as the safe haven bid kept core bond yields on a downward trajectory. Intra-EMU spreads widened a few ticks. Did this help to stop the rise of the euro? Whatever the reason, the decline of the (trade-weighted) dollar slowed. This was also visible in USD/JPY and EUR/USD.

During the weekend, ECB’s Draghi ‘warned’ at IMF spring meeting in Washington that a strengthening of the exchange rate of the euro required more monetary stimulus. Draghi and other ECB members elaborated also on the details of a potential QE program. At the same time, Ukraine is also returning into the spotlights as the government in Kiev has given separatists an ultimatum to lay down arms. EUR/USD opened half a big figure lower in Asia this morning. As was the case on Friday, Asian equities are mostly lower, but given the losses in the US on Friday, the damage is contained. Japan this time outperforms. USD/JPY is holding stable in the mid 101 area.

Today, the calendar in Europe is again thin, with only the EMU industrial production. In the US, the March retail sales are an important series to gauge the momentum in the US economy. The consensus expects a strong headline figure at 0.9% M/M. It won’t be easy to beat this high reference. So, we doubt whether the dollar will get direct support from the release of this report. Equities and global sentiment on risk will remain an important factor for trading on the bond- and the forex market. The poor close in the US on Friday and the tensions in Ukraine will probably keep a risk-off modus in place in Europe. We continue to look out whether lingering tensions will finally trigger a correction on the astonishing spread narrowing on the intra-EMU bond markets. Such a corrective widening could help to cap the topside in the euro. Markets will also mull the recent indications from Draghi on the strength of the euro and its implications for monetary policy.

Of late we advocated the view, that it will be difficult for EUR/USD to succeed a protracted rally beyond 1.40. For now, this working hypothesis remains under stress, but is still valid. In a short-term perspective, Friday’s EUR/USD chart shows a doji-like pattern. The 1.3906/67 area looks like a tough resistance. Caution remains warranted, but a guarded sell-on-upticks strategy can be reconsidered.

EUR/GBP rebound running into resistance?

On Friday, trading in cable and in EUR/GBP was mostly technical in nature. Cable tried to make further headway on global dollar weakness, but the 1.6823 cycle top proved to be a strong resistance. Mid-morning, UK February construction output was materially weaker than expected. Usually, this report is absolutely no market mover, but it provided an additional excuse to scale back cable long positions. The slide in cable also pushed EUR/GBP back to the 0.8300 area.

During the weekend, the euro was hit by Draghi’s comments that a strong euro will require more policy easing. EUR/GBP dropped to the 0.8275 area this morning. Cable is little changed in the 1.6720/40 area. This morning, the Rightmove house prices were reported very strong at 2.6% M/M and 7.3% Y/Y. We don’t have the impression that this report will be an important factor for sterling trading today.

Later today, there are no important data on the calendar in the UK. Friday, the correction in cable set the tone for sterling trading. Today, EUR/GBP is pressured by an overall setback of the euro after the comments from Draghi and due to the tensions in Ukraine. Those factors will probably continue to cap the topside in EUR/GBP. Later this week, we keep a close eye at the UK inflation data (Tuesday) and the labour market indicators (Wednesday). Strong figures might give sterling additional interest rate support, especially against the euro.

Of late, the technical picture in the major sterling cross rates was mixed. Cable recently rebounded off the 1.6460 low and the 1.6823 cyclical top was almost reached last week. For now, this proves a too high hurdle short-term, even as the dollar remains fragile across the board. We maintain the view that the top won’t be easy to break in a sustainable way, but broad dollar weakness might spoil the game. EUR/GBP drifted to the 0.8230 area early last week, but a real test of the 0.8200/0.8157 support area didn’t occur. The sterling momentum is constructive, but a break will probably be difficult as long as the euro remains well bid across.