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What's Next For Euro?

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 07/31 Meeting
NO CHANGE 64.0% 63.4%
CUT TO 0.00% 36.0% 35.3%
HIKE TO 50BP 0.0% 1.3%



For the second time this month, the euro ended the North American trading session higher against the U.S. dollar. Considering that we are on the 21st day of the month, the fact that the EUR/USD has only enjoyed 2 days of gains illustrates just how concerned investors are about Europe.  Since the beginning of the month, the EUR/USD has lost as much as 4.5 percent of its value as speculators aggressively add to their short euro positions. The sell-off in the euro has been accompanied (although some will say caused) by a sell-off in other high beta currencies and equities. The only silver lining is that the 2 days of gains in the euro occurred consecutively. Thanks to the rebound in stocks and the lack of newly negative news for Greece, the EUR/USD rose above 1.28 for the first time since last Tuesday. The recovery is tenuous at best and there are no shortages of reasons for why investors will want to continue selling euros but with EUR/USD short positions at a record high according to the latest CFTC IMM data, it won’t take much to trigger a short squeeze even if the longer trend is still downwards.

The next key event risk for the EUR/USD will be Wednesday’s informal EU Summit.  French President Francois Hollande has come out the gate strong, successfully eliciting support at this weekend’s G8 meeting for his pro-growth focus. Hollande ran on a campaign that austerity alone will not solve Europe’s problems and his international counterparts agree that growth measures need to be discussed.  Although nothing concrete has been proposed, Hollande is clearly throwing around his weight and making it known that he will not bend readily to the will of Germany. On Wednesday, Hollande is expected to test the Germans once again by pressing Chancellor Angela Merkel to reverse her veto on Eurobonds. Unfortunately this is one area that Merkel may not budge on because it would lower the borrowing costs for distressed nations at the expense of increasing the borrowing costs of German bonds. In other words, German taxpayers would be asked to bear more burdens for the problems of other nations. Nonetheless, with the Italians on his side, Hollande will most likely push Merkel to the edge of her comfort zone and the world will be watching closely to see if she bends. For the time being, we don’t expect any cooperation from the Germans which would be negative for the euro becomes it prolongs the crisis but if the selling resumes, the Germans may have no choice but to absorb some short term pain for the possibility of long term stability.

In the meantime, aside from the EU Summit, all eyes will be on Thursday’s Eurozone economic reports. May PMI figures and the German IFO will provide investors with the latest look at how the Eurozone economy has been performing. Despite all of the problems in Greece, Spain and Italy, Germany continues to outperform. With the high level of short EUR/USD positions, even a small upside surprise could trigger a short squeeze while weaker numbers would only reinforce everyone’s concerns. 


Like the EUR/USD, today was only the second day this month that U.S. stocks ended in positive territory. Although the rally in the S&P 500 was the strongest in more 2 months, with no fundamental driver, it is wishful thinking to hope that it has bottomed. The lack of U.S. economic data confirms that the dollar’s weakness can be attributed to an improvement in risk appetite. A renewed focus on growth in China helped to improve sentiment while no new surprises out of the Eurozone minimized volatility in currencies. According to a research report released by the San Francisco Fed today, the central bank is disappointed by the impact of Quantitative Easing on mortgages. The study found that general caution and the lack of competition meant that to the frustration of Fed officials, loan originators did not pass on lower rates to homeowners. While this means that Federal Reserve officials may need to do more, it also fuels criticism about QE1 and 2, which certain members of Congress already find controversial. Whether or not the Fed decides to increase asset purchases remains an open question but we have long held the view shared by Fed President Lockhart, a voting member of the FOMC. He believes that a more severe drop off in the economy is needed to justify another round of quantitative easing but “the use of a more refined communication toll is a (more) appropriate incremental action.”

The Richmond Fed manufacturing index and existing home sales are scheduled for release on Tuesday. After the surprise pullback in manufacturing conditions in the Philadelphia region, analysts are looking for a similar decline in activity in Richmond. If that is the case, then there is a chance for slower manufacturing activity across the nation. Existing home sales are expected to rebound after dropping for two consecutive months in February and March. Regardless of whether we have positive or negative numbers on Tuesday, these economic reports are second tier and should have a nominal impact on the U.S. dollar.


Of all the major currencies, we expect the most action in the British pound tomorrow. U.K. consumer prices are scheduled for release along with public sector finances. When the Bank of England met in April, one less member voted in favor of additional stimulus and when the minutes were released, it sparked a significant rally in sterling. Unfortunately since then, the tone of the BoE has been far more cautious with the central bank downgrading its growth forecast in their Quarterly Inflation Report. Last week, monetary policy official Posen said he may have been premature in dropping his call for more stimulus. In April, central bank officials were worried that inflation would not fall as quickly as they forecasted but since then commodity prices have fallen steeply, which should alleviate some concerns. Tuesday’s consumer price report will tell us exactly where inflationary pressures stood in April. CPI is expected to grow at a stronger pace but with producer prices easing and retailers dropping their prices, the odds certainly favor lower and not stronger inflation. Should CPI surprise to the upside, the GBP/USD could enjoy a much needed relief rally. If it disappoints, the GBP/USD could make another stab below 1.58. Even if CPI surprises to the upside, any gains should have been reversed in the month of May. U.K. finances are expected to show a surplus in April due to the transfer of assets from the Royal Mail pension fund. Unfortunately this boost is one-off and is therefore not indicative of healthier U.K. finances. 


The Canadian, Australian, and New Zealand dollars strengthened against the greenback today. The sharp reversal of the commodity currencies is correlated to the strong performance of the US stock market. Chinese Premier Wen Jiabao said in a statement today that he will step up the country’s fiscal and monetary policy to promote economic growth. As Australia’s largest trade partner this would be directly positive for Australia and the Australian dollar. Oil prices rose for the first time in seven days after Jiabao’s statement.  The only country that released economic data over the past 24 hours was New Zealand and despite slower growth in credit card spending, the NZD/USD still enjoyed the day’s strongest rally. The Reserve Bank’s recent caution is justified by a decline in net migration and weaker consumer spending. Tonight we are waiting for the RBNZ to release their Q2 inflation expectation at 23:00 ET / 3:00 GMT. New Zealand Prime Minster John Key is proposing an alternative way to fund health and education through savings elsewhere so that the country can ends its six years of deficits. Key is optimistic to lead the country’s deficit into a surplus even though the European crisis threatens growth. The surplus is forecasted to be at NZ$370 million by June 30, 2015. Spending restraints makes it harder for maintain growth and adds pressure to the central bank to keep interest rates low.  


The Japanese yen weakened against all major currencies today due to the rise of the stock market and improvement in risk appetite. In anticipation of possible measures to support growth and weaken the currency by the BOJ more people are leaving the safe haven currency. The yen, however, has been steadfast against US dollar for the past three months to the frustration of government officials. The European crisis is obviously the source their troubles and therefore not something they can resolve which means the currency may continue to strengthen in times of political, financial and economic turmoil. On May 18th, the finance minister, Jun Azumi, hinted that there is a possibility that there will be an intervention in the currency market. Vice Finance Minister Takehiko Nakao claims that they “are facing challenges from a very volatile exchange-rate market.” The BOJ will meet for a two-day meeting tomorrow to discuss the results of expanding their asset purchase program in February and April. On Friday, the data for Tokyo and Nationwide department store sales (YoY) were released and they did not perform as well as the previous month. This morning the All Industry Activity Index data worsened from the previous month’s data. April’s Convenience Store Sales performance increased from the previous month. Tomorrow the Supermarket Sales will be released at 1:00 AM ET / 5:00 GMT. 

GBP/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours is GBP/USD.  UK CPI, Retail Price Index, House Prices, Public Finances, and Public Sector Net Borrowing data are set to be released at 4:30 AM ET / 8:30 GMT. From the US we have the Richmond Feb Manufacturing Index and Existing Home Sales at 10:00 AM / 14:00 GMT.

The GBP/USD has been decline for the past month and is currently trading in a downtrend according to our Double Bollinger Bands; however, it has been strengthening for the past two days. Our first support will be at 1.5752 which is this month’s lowest point. If this support were to break then our second support will be at 1.5600 which is March 12th’s low and a psychological significant number. Should this currency pair recover then our first resistance will be at 1.6000 because it is a psychologically significant number and February 29th’s high. This level is also slightly above where our 10 day SMA and 50% Fibonacci Retracement, drawn from April 28, 2011 high to January 13th’s low, intersect. Should our first resistance break then our second resistance will be 1.6233 where our first standard deviation upper Bollinger Band is.