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Is EUR/USD Prime For Short Covering Rally?

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • UK Unemployment at best rate in nine months
  • EZ Trade Balance in line
  • Nikkei -1.12% Europe -0.58%
  • Oil at $92/bbl
  • Gold at $1536/oz.

Overnight Eco

  • AUD Westpac Consumer Confidence (MAY) 0.8% vs. -1.6%
  • JPY Tertiary Industry Index (MoM) (MAR) -0.6% vs. -0.3%
  • CHF ZEW Survey (Expectations) (MAY) -4.0 vs. 2.1
  • EUR Euro-Zone Consumer Price Index (MoM) (APR) 2.6%
  • EUR Euro-Zone Trade Balance s.a. (euros) (MAR) 4.3B
  • GBP Jobless Claims Change (APR) -13.7K vs. 4.9K
  • GBP Claimant Count Rate (APR) 8.2% vs. 8.3%

Event Risk on Tap

  • USD Housing Starts (MoM) (APR) expected at 4.0%
  • USD Building Permits (MoM) (APR) expected at -4.5%
  • USD Industrial Production (APR) expected at 0.5%
  • CAD Manufacturing Shipments (MoM) (MAR) expected at 0.3%

Price Action

  • USD/JPY trades to 80.35
  • AUD/USD drops to .9900 but stabilizes
  • GBP/USD stabilizes at 1.5950 post labor data
  • EUR/USD probes below 1.2700 but bounces

The selloff in risk FX continued in overnight European trade with EUR/USD plumbing fresh lows below the 1.2700 figure while cable dropped through the 1.5900 barrier in the wake of a dovish BOE inflation report. In Europe, authorities continued to navigate the Greek crisis with German Chancellor Angela Merkel reaffirming her support for Greece to remain within the monetary union, but fears of a run on Greek banks kept markets on the edge and the pair remained under pressure for most of the night after making several weak attempts at a rebound.

Cable initially received a boost from better than expected labor data as claimant count surprised to the upside declining by -13,700  versus forecasts of 4,900 gain. The unemployment rate dropped to 8.2% from 8.3% the month prior. This was the fastest pace of job growth in nine months indicating that UK labor markets remain relatively buoyant despite broader economic slowdown in UK.

This was the first back-to-back fall on the month in the claimant count since September and October 2010 and the largest monthly decline since July 2011. There was some speculation that the upcoming Olympics may have created a temporary uptick in labor demand, but there was no anecdotal evidence to that effect. London did show the largest decline in the claimant count of all the regions, but it was consistent with having the  largest population. On the down side, average earnings rose only 0.6% versus 1.1% eyed indicating that UK consumers are likely to remain under pressure as income growth lags far behind the CPI which continues to hover above 3%. 

The rally in cable was short lived however after a dour BOE inflation report which noted that growth in UK was slower than initially forecast while inflation would remain higher. The news drove the pair through the 1.5900 figure as traders sold in fears that the BOE may entertain further QE measures to stimulate the economy. The pair however is grossly oversold and may see a small rebound if risk appetite returns as the day progresses.

With risk FX in a near free fall, the currency market has quickly become skewed to the downside and is now vulnerable to a short covering rally on even a morsel of good news. If the Troika and Greece could amend their agreement requiring an easing of the bailout rules, the EUR/USD could quickly recover as fears of EZ fracture recede. If on the other hand, the market sees no signs of a compromise as Greece heads into another election the selling  in the pair could quickly accelerate with 1.2500 coming into view. Several analysts have pointed out that EUR/USD has made habit of making bottoms at mid-month points this year, but that pattern will only hold if there is some positive news on Greece.  

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Housing Starts (MoM) (APR) 4.0% -5.8%
USD 12:30 8:30 Building Permits (MoM) (APR) -4.5% 4.5%
USD 12:30 8:30 Industrial Production (APR) 0.5% 0.0%
CAD 12:30 8:30 Manufacturing Shipments (MoM) (MAR) 0.3% -0.3%