The Euro is squeezing mercilessly higher into the ECB meeting today. That meeting might put the kibosh on the rally if the negative deposit rates discussion is re-opened at the Draghi press conference.
It’s rather obvious why the sterling is rallying again after its run at 1.5000. We’ve seen a string of rather positive numbers out of the U.K., while data out of the U.S. has been decidedly mixed. This leaves the market expecting a whole lot of nothing from today’s BoE meeting, the final under the leadership of Mervyn King. The first meeting under the incoming Carney is already up in early July, but judging from the momentum of the data, developments will be few and far between at that meeting as Mr. Carney gains his sea legs.
It’s a bit hard to justify the Euro upside from recent developments, as the data is not particularly supportive, to say the least. The action may have a larger element of positioning squeezing on consensus short EUR/USD trades, but also due to the action in the USD/JPY pair, where flows are undoubtedly very heavy during this correction due to the attention the break back below 100.00 has garnered.
If Draghi appears positive and not particularly bothered by the situation and we merely see the recirculation of a future ABS funding-for-lending type scheme and no mention of negative deposit rates, the Euro could just continue to slip higher from here. But if we see growth forecasts downgraded, and a more prominent escalation of the potential for negative deposit rates in addition to a funding for lending setup, we are likely to see a Euro pivot back lower. The EUR/JPY, EUR/GBP and EUR/USD could all be interesting for downside potential in this regard - particulalrly the EUR/JPY, if accompanied by a strongly rallying Bunds market.
Technical/chart observations
If we look at the crosses that have been performing the best, these include the EUR/AUD, AUD/JPY (downside) and GBP/AUD as the Aussie is clearly the goat of the G10 while the odd trio of EUR, GBP and JPY have been the strongest performers. If we get a strong pivot lower in the Euro today, this could finally bring some relief to the beleaguered Aussie, particularly as we’ve come close to super-critical levels around 0.9400 in AUD/USD on this latest run lower.
EUR/USD - The pair has taken out all of the basic retracement levels, and will be event-risk driven with today’s ECB meeting. 1.3200 is basic resistance and the 1.3000 the basic support in the days ahead. Downside potential is greater eventually, but the rally looks healthy technically. Hmm…
USD/JPY - The zone just below 99.00 has shaped up as important support. The other side of the U.S. employment report tomorrow is needed for a near term resolution, as this pair likely to be heavily data-driven. 100.50/80 looks like the upside pivot zone for now, and the Ichimoku levels of interest come in below 97.50 presently, but will be rapidly rising in a few days’ time.
EUR/JPY - Interesting downside potential toward the 127.00 area Ichimoku daily cloud should the ECB roll out the dovish scenario, and Bunds rally strongly. Otherwise, it’s just been a chop-fest in the range
GBP/USD - The pair has defied expectations. We need a very loud pivot back towards 1.5300 lower to feel safe in shorting, otherwise the only resistance is the 1.5600 area from early May.
EUR/GBP - Reasonable downside potential on a dovish ECB, which could eventually see the 0.8400 area support challenged if we are able to hold below 0.8500 after today’s events. To the upside, the 0.8525 is the first resistance.
EUR/CHF- Time to start looking at call options with expiry beyond the June 20 SNB meeting. For the shortest term, the direction is likely to track that of USD/JPY or EUR/JPY. 1.2300/25 is an interesting support zone.
USD/CHF - Things are looking very ugly now for the bulls. We need higher rates and the USD/JPY to turn around before this one appears to have rally potential. Looks oversold in the near-term. Note the rising trend-line levels coming in higher every day (still well below 0.9400).
AUD/USD - The AUD is “technically oversold” now, and momentum is beginning to look a bit divergent as we have neared a particularly interesting structural area near 0.9400. A rally back above 0.9600 or so, would begin to argue for a larger-scale correction sequence.
Chart: AUD/USD
Note the divergent momentum on the stochastics – new low prices without new lows in momentum. This is the second time this has happened recently, as the hammer on May 29 was a good warning for the eventual sharp consolidation higher before the latest downdraft. We need a decent rally – perhaps above 0.9550/0.9600 for confirmation. However, the bears may have overextended themselves in the short term.
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USD/CAD - This pair is trying to put us to sleep again, and looks like a range-rover until we close back above 1.0400 perhaps, or perhaps below 1.0250. Big picture, I still prefer buying the dips.
Looking ahead
Watch bonds at all times for a read on the potential direction for USD/JPY, and whether we should remain in correction mode. Remember, of course, that tomorrow sees the final big event risk of the week with the U.S. employment report. The USD needs to be considerably stronger on the other side of that report against the other super majors, or the structural bull rally in the greenback could appear increasingly on the ropes.
Economic Data Highlights
- Australia Apr. Trade Balance out at +28M vs. +180M expected and +555M in Mar.
- Switzerland May CPI out a at +0.1% MoM and -0.5% YoY vs. +0.1%/-0.6% expected, respectively and vs. -0.6% YoY in Apr.
- Germany Apr. Factory Orders (1000)
- UK BoE Rate/Asset Purchase Decision (1100)
- US May Challenger Job Cuts (1130)
- Euro Zone ECB Announces Rates (1145)
- Euro Zone ECB’s Draghi Holds Press Conference (1230)
- US Weekly Initial Jobless Claims (1230)
- US Bloomberg Weekly Consumer Comfort Survey (1345)
- Canada May Ivey PMI (1400)
- US Fed’s Plosser to Speak (1600)
- Australia AiG Performance of Construction Index (2330)