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Can Euro Stage a Bounce?

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • Risk stages a small rally in late Asia but quickly fizzles
  • German inflation eases on energy declines
  • Nikkei up 0.74% Europe up 0.16%
  • Oil at $91.66/bbl
  • Gold $1576

Overnight Eco

  • AUD HIA New Home Sales (MoM) (APR) 6.9% vs. -9.4%
  • JPY Jobless Rate (APR) 4.6% vs. 4.5%
  • JPY Retail Trade s.a. (MoM) (APR) 5.8% vs. 6.2%
  • JPY Household Spending (YoY) (APR)2.6% vs. 2.5%
  • CHF UBS Consumption Indicator (APR) 1.41 vs. 1.20
  • EUR German Consumer Price Index (MoM) (MAY P) n/a
  • GBP Nationwide House Prices s.a. (MoM) (MAY) n/a

Event Risk on Tap

  • USD S&P/CS 20 City s.a. (MoM) (MAR) expected at 0.2%
  • USD Consumer Confidence (MAY) expected at 69.5

Price Action

  • USD/JPY steady at 79.40
  • AUD/USD rallies towards .9900 but backs off
  • GBP/USD capped at 1.5700
  • EUR/USD trades back to 1.2550 after early breakout

Risk currencies staged a small rally on the first full trading day of the week but the up move quickly fizzled as concerns over Spanish sovereign debt  continued to weigh on the market. Both EUR/USD and AUD/USD rose throughout Asian session trade boosted by investor optimism of further stimulus from China. China’s premier Wen Jibao suggested that the country may expand its infrastructure program in Western China stocking optimism among investors that these new measure could bolster growth in H2 of this year.

However, the optimism in the equity markets was quickly offset by concerns in the credit markets as the German/Spanish spread rose to its lifetime highs and Spanish bonds inched towards the 6.5% level.  Additionally the Italian auction of short term bills resulted in full take up but at lower bid to cover ratio and higher yields of 2.104% from 1.772% the period prior, providing little help to the euro.

In economic news German import price inflation printed much cooler than expected at -0.5% versus -0.2% eyed hitting a two year low as cheaper energy prices dampened gains. This was the first month over month decline since last October bringing the annual rate to 2.3% - the lowest rate in nearly two years.

Excluding energy, imports remained flat on a month over basis. The lower energy costs are having a positive impact on prices on the consumer level as well. May consumer price data from the German state of Saxony showed cheaper energy dampened the monthly change, while the annual rise slipped below 2% for the first time since early 2011. National estimates of German inflation are scheduled for release later today. 

Lower inflation data may allow the ECB to become more accommodative in its monetary policy which could provide the much needed boost for the EUR/USD but for now the silence from Frankfurt is deafening as Mr. Draghi and company are doing nothing to ease the credit tensions in the region. Still, after several weeks of relentless selling the EUR/USD appears to be forming a base at the 1.2500 level. Many analysts have pointed out that euro shorts are at record highs on the CME suggesting that positioning has become so skewed that the pair may be due for a short covering rally.  

With little economic data on the calendar today save for Consumer Confidence at 14:00 GMT, FX will likely take its cue from equities when North America opens for trade after a holiday week-end. If US equities stage a rally EUR/USD may make another run at the 1.2600 level while Aussie tries to target .9900. If on the other hand risk aversion flows resume we could see fresh year to date lows for both pairs as the day proceeds.   

FX Upcoming

Currency GMT EST Release Expected Prior
USD 13:00 9:00 S&P/CS 20 City s.a. (MoM) (MAR) 0.2% 0.2%
USD 14:00 10:00 USD Consumer Confidence (MAY) 69.5 69.2