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Understanding the Volatility and Outlook for Euro

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 07/31 Meeting
NO CHANGE 64.0% 64.0%
CUT TO 0.00% 36.0% 36.0%
HIKE TO 0.50% 0.0% 0.0%



After a significant amount of intraday volatility and a drop to a fresh 22 month low of 1.2288, the euro ended the North American trading session higher against the U.S. dollar. This is only the third time in more than a month that the EUR/USD rallied as investors hope for less pain in June. Expectations for support from European policymakers can only be credited for a small part of the euro’s rally because so far there has been nothing but radio silence. Prior speculation that the IMF is preparing for a bailout of Spain has been denied by IMF Chief Christine Lagarde. However as stocks continue to fall and currencies extend their losses, the pressure for a response from European policymakers will only increase and with a number of meetings scheduled for this month, they won’t be able to avoid the issues for much longer. Yet an abysmal non-farm payrolls report is the primary reason why the EUR/USD rebounded today. Throughout the past month, better than expected U.S. economic data limited the need for QE3 but after today’s jobs number, the Fed may have no choice but to spring into action in June.  Adjustments to monetary policy expectations and the triggering of stops in the EUR/USD caused wild swings for the currency and abnormal trading behavior. On a day when U.S. stocks are down close 2 percent, we would typically expect currencies including the euro to weaken across the board but the EUR/USD has become so oversold that it was overcome with profit taking.  According to the latest CFTC IMM report, speculators added to their short EUR/USD positions over the past week but that data was as of Tuesday and judging from today’s price action, there is a good chance that some positions have been pared.

U.K. markets are closed Monday and Tuesday for a 4 day weekend and so we issue the same warning as last week which is to beware of weekend event risk. The chance that Greece will make a decision about leaving the euro this weekend is slim and we don’t believe European politicians having enough political will to agree on boosting the Eurozone’s firewall but the extra long weekend is the perfect opportunity for them to use market closures to their advantage. However in all likelihood, nothing will happen, leaving the European Central Bank’s monetary policy announcement on Thursday as the next potential opportunity of stability. While the ECB can’t solve Europe’s fiscal and structural problems, they can lend enough support to the market and renew risk appetite. We do not expect the ECB to ease monetary policy next week, but they could AND should hint that more easing is on the way. With economic data deteriorating in Europe and around the world, more stimulus is inevitable, so why wait any longer when investors and consumers are under significant pain. Aside from the ECB meeting, the EU will also release its revised forecasts for the Eurozone and don’t expect them to be pretty. German industrial production and factory orders are also scheduled for release along with Eurozone retail sales and producer prices. Italy also has a bond auction worth watching. 


This morning’s non-farm payrolls report was a game changer for the Federal Reserve. While the Fed never gave up on the idea of implementing a third round of Quantitative Easing, signs of improvement in the U.S. economy did not make it a realistic possibility. Unfortunately with today’s non-farm payrolls report and the revisions to last month’s numbers, the Fed will have no choice but to ease again. Their next monetary policy announcement will be on June 20th, after the Greek elections and the G20 meeting. If the elections do not go well and the winner wants to drag out the pain by calling for a renegotiation of the bailout terms, leading to more weakness in currencies and equities, the Fed may have to act. At that point, they might as well coordinate their action with other countries and offer a global response after the G20 meeting. The 69k increase in payrolls was the weakest in 20 months but what made the report even worse were the increase in the unemployment rate from 8.1 to 8.2 percent and the sharp downward revision in April payrolls. At this point, the Fed has very little reason NOT to pull the trigger on QE3 because there was not just one but two months of job growth under 100k. If the Fed doesn't offer more stimulus soon, the U.S. economy could be headed back to recession. The ISM manufacturing report added salt to the wound – not only did job growth slow but manufacturing activity is losing momentum as well.  The dollar sold off against all of the major currencies from the Yen to the euro, prompting what smelled like Bank of Japan intervention in USD/JPY. Nothing has been confirmed but banks have confirmed that they have been checking rates. With 2.5 weeks to go before the G20 meeting, the dollar could still attract buyers if there is no response out of Europe and deleveraging resumes. Non-manufacturing ISM is due for release next week along with the Fed’s Beige Book report. Given the latest disappointments, we expect the reports from individual Fed districts to paint a grim picture of the U.S. economy.


The British pound weakened against the U.S. dollar and euro on the heels of weaker U.K. economic data. Like many parts of the world, the U.K. manufacturing sector fell victim to weaker domestic and global demand. According to Markit Economics whose index fell from 50.2 to 45.9, manufacturing activity contracted by the fastest pace since 2009. This is also the first time in 6 months that the sector contracted which does not bode well for an economy that is already in recession. Next week, the Bank of England’s monetary policy committee will convene to decide whether more asset purchases are necessary. Based on recent comments from policymakers, there is a growing base within the central bank that supports more stimulus.  Aside from the meltdown in the financial markets, consumer spending has also been very weak and inflationary pressures have eased. With manufacturing activity slowing, MPC members do not need to look far for reasons to extend their QE program. Banks cross Wall Street have already issued forecasts for a GBP50 billion increase in asset purchases and while we agree that more is needed, the BoE may choose wait a few weeks to issue a coordinated response that would undoubtedly have a greater impact on the markets. In addition to the BoE meeting, U.K. producer prices and PMI services are also scheduled for release. 1.5230 is support in the GBP/USD and if the Bank of England eases next week, the currency pair could test that level. 


The Australian and Canadian dollars extended their losses against the greenback while the New Zealand dollar held steady. Both Australia and Canada have monetary policy announcements next week and the performance of the AUD and CAD could reflect the market’s expectations for dovish comments and possibly action by one the central banks. Interestingly enough the Reserve Bank of Australia and the Bank of Canada are on completely opposite sides of the spectrum. When the RBA last met, they cut interest rates by 50bp and when the BoC last met, it talked about raising rates.   This month, the RBA is expected to ease again but by only a quarter point cut is expected. Although job growth improved, consumer spending has been weak while manufacturing activity continued to slow. According to the latest PMI report, manufacturing activity reached its weakest level since September. More rate cuts are on the way and it is only a matter of time before the RBA moves again. Meanwhile it will be difficult for the bank of Canada to remain hawkish with the meltdown in the global financial markets. The domestic economy has been healthy with strong job growth and increased consumer spending. However the decline in oil prices will start to affect Canadian industries which could eventually filter down to consumer demand.   The Canadian economy expanded by 0.1 percent in March after contracting 0.2 percent in February. In the first quarter, growth remained steady at 1.9 percent. Aside from the monetary policy announcements, Australian and Canadian employment reports are also scheduled for release along with Australian Q1 GDP and Canadian IVEY PMI. As a result, it will be a busy week for the comm. dollars, particularly the AUD. 


The Japanese Yen traded higher against all of the major currencies with the exception of the euro and Swiss Franc. The burning question on everyone’s minds today is whether or not the Bank of Japan intervened in the currency market to weaken the Yen. At 8:45am ET / 12:45 GMT, right after USD/JPY fell to a low of 77.66, the currency pair soared 100 pips in approximately 5 minutes. Sharp and fast moves such as these are usually characteristic of central bank intervention but nothing has been confirmed outside of some banks saying that the Japanese were checking rates. However there is also reason to believe that this wasn’t BoJ intervention because when the BoJ intervenes, we tend to see a larger than 100 pip move in USD/JPY. Regardless, it is clear that we are nearing the pain threshold for the Japanese government.   Finance Minister Azumi pledged once again last night to take decisive action if excessive FX moves continue. He screamed that one-sided Yen strength clearly does not reflect economic fundamentals. Senior MoF Official Nakao agreed that continued Yen rise could cause a lot of damage to public psychology and should excessive Yen moves continue, not just vs euro but vs dollar “we will respond decisively.”

EUR/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the Monday will be EURUSD. On Monday the Eurozone will be releasing PPI at 5:00 ET / 9:00 GMT. This will be followed by the US Factory Orders report at 10:00 ET / 14:00 GMT.

EURUSD is currently in a downtrend according to our Double Bollinger Bands. The first support will be below today’s low near the lower second standard deviation Bollinger Band at 1.2270. Should this support break the second support will be at 1.2100 because it was a previous low at June 16, 2010 and is a psychologically significant number. On the upside the resistance will be at 1.2483 which is at the lower first standard deviation Bollinger Band. Should the resistance break then the second one will be at 1.2700 where the 20 day SMA lies.