Quiet FX sessions in Asia and Europe, as markets turn to the revised U.S. fourth quarter gross domestic product (GDP) figures and to the increasingly relevant weekly claims on unemployment insurance; both are due at 8:30 am. EUR eased off yesterday’s $1.5145 highs to $1.5100 as dollar selling somewhat stabilized but the overall tenor remains largely USD negative.
Euro unlikely to drop below $1.50 soon
More positive news from the Euro zone’s largest economy as German unemployment dropped to 8.6% in February from 8.7% in January, while the number of unemployed fell by 75,000 people, exceeding forecasts of 50,000 decline. Aside from the fundamental underpinnings (back to back business sentiment strength from IFO survey and rising Euro zone inflation), the euro’s rise against the dollar is seen maintaining momentum, as it is not only part of a broader U.S. dollar weakness courtesy of the Fed’s willingness to compromise inflation for further rate cuts, but also part of a wider euro rally. This is clearly seen in the euro’s notable rally versus strong currencies such as AUD and NZD.
The other reason the euro is expected to maintain, if not add to rising momentum, is that the European Central Bank (ECB) is unlikely to jawbone the recent run up due to the advantages of currency strength in containing the costs of soaring oil prices. With euro zone inflation more than a full percentage point above its preferred 2.0% inflation ceiling, this rally is here to stay. As for concerns as to whether the currency is too strong for the Euro zone, the euro’s trade weighted index against 12 currencies has not yet regained the highs of mid January.
Excluding any jawboning from Euro zone politicians, we expect EUR/USD to remain underpinned at 1.5060 backed by 1.5020. Today’s US data carry the potential of boosting the pair towards $1.5120, followed by 1.5145.
EUR/CAD: We add to our Tuesday call favoring EUR/CAD as CAD bullishness is seen on the wane ahead of Tuesday’s Bank of Canada (BoC) rate decision. We expect the bounce to reach towards the 50-day moving average of 1.4815, followed by 1.4855. Downside risk to this strategy emerges from potential jawboning by the ECB regarding the euros’ currency strength. Drastic calls from political figures such as French President Sarkozy may also temper the current boost to the currency, but we expect ECB hawkishness to prevail especially at a time when soaring oil prices are fuelling the already rising inflationary pressures. Possible target stands at 1.49 next week, with key foundation stands at 1.4640.
EUR/GBP: Now that the pair has broken above our previous objective of 75.75 to 76.10, we see interim retreat towards 75.85 and 75.70, where stability is expected to be established. Before renewed run-up towards the 76.00 figure.
EUR/NZD: The pair has risen past our objective of 1.8520 and 1.8595 to 1.8620. we expect further gains in the euro vs. the kiwi due to:
The decline in New Zealand’s Business Confidence index, which tumbled to nine-month lows in February to -43.9 from -4.9;
potential nervousness causing general drag on high yielding AUD and NZD against lower yielding currencies;
contrasting momentum play between EUR and NZD. We look for further upside towards 1.8620, and onto the 50-day MA at 1.8660.
Sterling rebound capped at $1.9890
Since sterling’s rally has occurred largely on the back of USD weakness, we consider this an unconvincing sign for cable, which remains bearish in our view. But we cannot discount the possibility of further U.S. data weakness, which could be an issue if U.S. GDP comes in below 0.8% and weekly jobless claims rise above 350,00. Upside capped at $1.9870, followed by 1.9890. Support stands at 1.9830.
USD/JPY awaits U.S. data and 1395 S&P
We maintain our medium-term bearishness in USD/JPY despite the pair’s sharp breach of the four-week trendline support of 106.80, which we now expect to act as interim resistance on the current 106.40s. Upside to remain pressured at 106.70. USD/JPY support seen retesting 105.90, with key foundation at 105.45.
It is important to bear in mind the S&P 500 and whether it is able to breach above the key 1,385-90 levels, which are the 50-day MA, three-month trendline resistance and 50% retracement of the decline from the Nov. 12 high to the Jan. 23 low. Stochastics indicate a possible excess in momentum at the said level. Strength of the rally shall be tested against whether the index closes above 1,395. Failure to do should keep NZD under pressure and boost the EUR/NZD pair.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
Direct: 646.871.6809
Cell: 646.639.6825
Genl: 212.644.4220
Fax: 212.644.4222
Email: a.laidi@cmcmarkets.comOffices
