Eur/usd - page 96
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EUR/USD weekly outlook: May 12 - 16
The euro extended losses against the dollar into a second session on Friday, falling to a one-month low at the close, one day after the European Central Bank flagged possible monetary easing as soon as next month.
EUR/USD was at 1.3756 late Friday, the weakest level since April 8, down 0.60% on the day. For the week, the pair was off 0.85%.
The pair is likely to find support at 1.3695 and resistance at 1.3843, Friday’s high.
The euro fell from two-and-a-half year highs against the dollar on Thursday after ECB President Mario Draghi said the bank is “comfortable” with acting to shore up growth and stop inflation from falling too low at its next meeting in June.
The comments came after the ECB left rates on hold, as expected.
Draghi also said the strength of the euro was “a serious concern” and added that the bank would be closely monitoring exchange rate developments.
The single currency came under additional pressure after data on Friday showed that German exports fell 1.8% from a month earlier in March and the country posted a smaller-than-forecast trade surplus.
The euro dropped to two-month lows against the yen, with EUR/JPY at 140.09 late Friday, the weakest since March 4. The pair ended the week down 1.15%.
The U.S. dollar weakened against the other major currencies earlier in the week after Federal Reserve Chair Janet Yellen struck a dovish tone on the economy during testimony to the Joint Economic Committee of Congress.
Speaking Wednesday, Ms. Yellen said that a high degree of monetary accommodation remains warranted given the slack in the economy.
The Fed chief also said the bank expects economic growth to accelerate this year despite the slowdown in the first quarter but warned that the recent housing market slowdown "could prove more protracted than currently expected."
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Correction Or Trend Reversal?
Heightened speculation that the ECB will move next month, coupled with frustration with the euro offers in front of $1.40 level held, triggered a reversal of the dollar at the end of last week against the European currencies. As they weakened, cross positions were unwound, and the soft US Treasury yields lent the yen support.
The key issue for market participants is whether the price action is a technical correction or a change in underlying fundamentals. At this juncture, we are more inclined to view it as a technical correction, albeit one that may have more room to run, than a change in the underlying fundamentals.
We have yet to be persuaded that the real drivers of demand for the euro are going to be addressed by ECB action in early June. The demand for the euro is coming from the large regional current account surplus, the strong foreign demand for euro area bonds, and continued deleveraging and capital raising by euro banks, including the sale of portfolios of distressed loans to foreign (largely US) investors.
US economic data is generally pointing to a strong rebound after the world's largest economy stagnated, or worse, in Q1. However, Fed policy is seen as practically on auto-pilot and most of the data in next few weeks is not going to impact the pace of the tapering operation or bring forward expectations of the first rate hike.
The Dollar Index staged a key reversal on May 8 and was lifted further by following through buying on May 9 ahead of the weekend. Despite the sharp recovery, the Dollar Index failed to rise above the previous week's high. The band of resistance between 79.90 and 80.20 is the key to a stronger recovery. A break of the 79.25 area would warn that that upside correction is over.
The euro briefly traded below the 10-month uptrend drawn off last July lows and the February and April lows this year. It came in around $1.3780. Resistance is now seen in the $1.3840-55 area. On the downside, once that trend line is convincingly violated the next immediate target is near $1.3740 and then $1.3675.
Initially, Draghi's comments saw the euro blow through the upper end of its Bollinger® Band near $1.3910 but stopped shy of the psychologically important $1.40 level. It staged a key reversal and tested the lower Bollinger Band near $1.3765 ahead of the weekend. This seems to suggest the likelihood of some consolidation in the early part of next week.
The dollar recorded lower highs each session last week against the yen. However, in the second half of the week, the dollar's downside momentum vs the yen eased as it hugged the lower Bollinger Band. We had anticipated the dollar would bottom below JPY101.50, and that view is still intact. Additional support is seen nearer the 200-day moving average (~JPY101.10). The JPY102 area offers immediate resistance.
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Euro stabilises but still in the doldrums on ECB threat
The euro started the week on a steadier footing after two straight sessions of steep losses, but should stay under pressure amid the persistent threat of policy action from the European Central Bank.
The common currency, which plumbed a one-month trough of $1.3745 on Friday, last held steady on the day at $1.3754.
The euro has shed roughly 1.7 percent since hitting a 2-1/2-year high of $1.3995 on Thursday, having come under pressure after ECB President Mario Draghi said the bank was ready to take action next month should updated inflation forecasts merit it.
Against the yen, the euro edged up 0.1 percent to 140.24 yen , not far from a two-month trough of 139.88 set on Friday.
With its decline since Thursday, the euro has retreated toward the middle of its range so far this year. Possible support lies at that midpoint of its 2014 range near $1.3735, and the euro's 100-day moving average at about $1.3740.
"It remains to be seen whether this will prove to be the start of a full-blown
downtrend, or ends up being just a corrective move," said a trader for a Japanese bank in Singapore.
"But I don't get the sense that it's over," the trader said. The euro now looks more sensitive to negative factors and could come under pressure versus the dollar if U.S. economic indicators come in strong, he added.
Some traders said the drop in the euro may be done for now as investors wait for fresh reasons to sell the currency. They will be paying close attention to a number of ECB speakers this week including Vice-President Vitor Constancio.
"The market will seek confirmation of the ECB's willingness to act," analysts at Barclays Capital wrote in a note to clients.
Investors will also be keeping an eye on developments in Ukraine amid fears the country is sliding into civil war. Pro-Moscow rebels on Sunday declared a resounding victory in a referendum on self-rule for eastern Ukraine.
With the euro looking shaky, the dollar held steady against a basket of major currencies at 79.894, having staged a dramatic turnaround from a 20-month trough of 78.906 plumbed on Thursday.
The greenback inched up 0.1 percent versus the yen to about 101.97 yen, staying above a three-week low of 101.43 yen set last Wednesday.
The Australian dollar held steady at $0.9359, still within striking distance of a near one-month peak of $0.9395 set on Thursday.
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Swiss Retail Sales Growth Accelerates In March
Switzerland's retail turnover growth accelerated in March on robust non-food product sales, data from the Federal Statistical Office showed Monday.
Real retail sales grew 3 percent in March from last year, more than double the 1.2 percent rise posted in February. Excluding fuel, retail sales advanced 3.1 percent.
Excluding fuel, retail sector sales advanced 3.1 percent annually after rising 1.3 percent in February. Food, beverages and tobacco sales gained 0.8 percent, while non-food sales surged 4 percent.
Meanwhile, the monthly increase in overall retail sales slowed to real 1 percent from 1.2 percent a month ago.
Euro Trades Near One-Month Low as Citigroup, UBS Predict Decline
The euro traded within 0.2 percent of the lowest level in a month versus the dollar as Citigroup Inc. and UBS AG forecast further declines amid signs the European Central Bank is set to ease monetary policy.
The shared currency was little changed after posting its biggest weekly drop since March as ECB President Mario Draghi signaled May 8 the central bank may ease policy next month. The yen fell versus 12 of its 16 major peers after data showed Japan’s current account surplus shrank more than economists forecast. The dollar reached the highest level versus a basket of 10 major currencies in more than a week.
“We are bearish and think that finally the ECB is ready to back words with action,” said Geoffrey Yu, a foreign-exchange analyst at UBS in London. “The market is pricing in some degree of accommodation ahead. The level of the euro is going to jeopardize the ECB’s inflation forecasts.”
The euro was at $1.3762 as of 10:40 a.m. in London after falling to $1.3745 on May 9, the lowest since April 8. It weakened 0.8 percent versus the dollar last week, the steepest decline since the period ended March 21. The single currency added less than 0.1 percent to 140.23 yen. Japan’s currency was little changed at 101.89 per dollar.
“The euro can fall to around $1.33 heading into the third quarter,” UBS’s Yu said.
Draghi said at a news conference in Brussels that “the Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June.” The ECB next sets policy on June 5.
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Great post. Interesting article.
ECB’s Constancio won’t speculate on ECB action in June
The item in bold is probably the most important point we need to concentrate on and one that might give us an edge for trading the June meeting. It sounds like they will be making a decision more on the forecasts than possibly the actual data. This means we could see the market taking the euro up on stronger inflation numbers in both the revised data on Thursday, and the flash data in June as they price out a risk of policy changes. If the staff projections then show inflation staying low or going lower then the ECB is likely to act, as expressed by Draghi. Something to bear in mind.
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Euro holds line on dollar, drops against sterling
The euro held modest gains against the dollar and yen on Monday, unperturbed by the weekend referendum in Ukraine in which pro-Russian rebels declared victory in a self-rule vote, further escalating tensions.
Against sterling however, the euro fell to a 16-month low on growing bets the European Central Bank will ease monetary policy just as the Bank of England prepares to raise interest rates.
"We think that near-term data is likely going to allow market participants to continue to romance the possibility that the Bank of England becomes the first of the G4 central banks to embark on policy tightening," said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.
"Certainly the stronger data is likely to lead the market to see the BOE's dovish message as perhaps a bit less credible," said Daingerfield.
Dealers said the market had calmed after a turbulent reaction to ECB President Mario Draghi's statement last week that the bank was "comfortable" with easing monetary policy in June.
Analysts pointed to appearances by some of Draghi's colleagues - most notably Bundesbank chief Jens Weidmann - as possible sources of more clarity on whether the bank is really ready to act.
The euro's gains were trimmed after Austrian central bank chief Ewald Nowotny told reporters it would take more than a cut in interest rates to combat low inflation in the euro zone.
Expectations for a BOE rate increase helped push the yield premium offered by two-year British gilts over euro zone bonds to its biggest since 20008. A BOE quarterly inflation report on Wednesday could include changes to the central bank's interest rate outlook, given Britain's stronger-than-expected economic recovery.
The euro fell as low as 81.43 pence, its weakest against sterling since January 2013. Sterling rose 0.12 percent to $1.6870.
However, the euro traded up 0.06 percent against the greenback at $1.3765, having tumbled last week from a 2-1/2 year high of $1.3995.
Markets showed little reaction to the Eastern Ukraine voting, which overwhelmingly supported self-rule.
The European Union declared the referendum illegal and increased pressure on Russia on Monday by taking a first step toward extending sanctions to companies, as well as people, linked to Moscow's annexation of Crimea.
"The story has been going on for a while and unless there is a significant escalation, at least in G10 markets, they have learned how to live with it," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
"There were some concerns about the referendum obviously, but it looks like risk is holding up fairly well," he said.
The euro edged up 0.24 percent to 140.51 yen, up from a two-month trough of 139.84 yen hit Friday. The dollar rose 0.25 percent to 102.10 yen.
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German Wholesale Prices Fall At Slower Pace
Germany's wholesale prices declined at a slower pace in April, figures from Destatis showed Tuesday.
Wholesale prices were down 1.3 percent in April from last year, following a 1.7 percent drop in March. This was the tenth consecutive fall in wholesale prices.
Month-on-month, wholesale prices gained 0.2 percent after staying flat in March.
Cost of grains, unmanufactured tobacco and animal feeds plunged 9.8 percent annually and solid fuel prices slid 3.8 percent. Metal and metal ores prices were down 5.2 percent.
Meanwhile, prices of fruits and vegetables rose 0.4 percent and milk, eggs and edible oil prices climbed 5.6 percent.
Bundesbank Open to Significant ECB Stimulus in June if 2016 Inflation Forecasts Lower
Germany's central bank is willing to back an array of stimulus measures from the European Central Bank next month, including a negative rate on bank deposits and purchases of packaged bank loans if needed to keep inflation from staying too low, a person familiar with the matter said.
ECB staff inflation projections for 2016, which are due in early June, will be central to the Bundesbank's appetite for additional easing steps, the person said.
This marks the clearest signal yet that the Bundesbank, which has for years been defined by its conservative opposition to the ECB's emergency measures to combat the euro zone's debt crisis, is fully engaged in the fight against super-low inflation in the euro zone using monetary policy tools.
The Bundesbank's stance could provide critical support for ECB President Mario Draghi, particularly in Germany, when the ECB meets next month to weigh interest-rate cuts and other stimulus measures. Mr. Draghi put financial markets on notice last week that additional easing was possible against a backdrop of weak annual inflation which, at 0.7% in the euro zone, is far below the ECB's target of just under 2% over the medium term.
Central banks typically strive for low inflation, which keeps borrowing costs down and provides a stable backdrop for households and businesses to spend. But when it is too weak debts become harder to service, and consumers may put off purchases in the hope that prices will fall.
"The Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in early June," Mr. Draghi said Thursday, after the ECB kept its key interest rates unchanged at record lows. "Certainly there is consensus or unanimity in not being resigned to the present low inflation for a too long, too protracted a time," he said.
But the Bundesbank's backing has limits. It remains resistant to large-scale purchases of public and private debt, known as quantitative easing, the person said. The Bundesbank has discussed this option internally but has concluded that with government and corporate bond yields already quite low in Europe, the purchases wouldn't do much good and could instead create financial stability risks.
But the Bundesbank is still open to significant stimulus steps, the person said, including: reductions in the ECB's lending and deposit rates; extension of unlimited loans to commercial banks—known as fixed rate, full allotment—from mid-2015 until mid-2016; offering new long-term loans to banks at a fixed rate to further beef up the ECB's forward guidance; and some purchases of asset-backed securities.
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