The common European currency extended its recent gains yesterday, following some remarks from German Chancellor Angela Merkel. Speaking about the causes of Germany’s large trade surplus, she indicated that the euro is ‘too weak’ due to the ECB’s policy, which makes German products relatively cheaper. Even though such rhetoric is not particularly new coming from Germany, considering that Finance Minister Schauble has repeatedly made similar comments, it was enough to add further fuel to the recent bullish sentiment surrounding the euro.
Moving forward, we stick to our guns that the near-term path of the least resistance for the euro is to the upside. Diminished political risks in the Eurozone, prospects for a more optimistic tone by the ECB at one of its upcoming meetings, and continued strength in the bloc’s economic data support our view. Our favorite proxy for further euro gains remains EUR/USD. Political risks remain elevated in the US, generating market skepticism over Trump’s ability to push his tax plans through Congress, something evident by the decline in both US Treasury yields and the recent plunge in 5y5y inflation expectations. In addition, given the elevated expectations for a June rate hike (78.5% according to the Fed funds futures), we think that near-term risks surrounding the USD from monetary policy may be asymmetrical. Any signs the Fed may not hike in June could generate a bigger negative market reaction than the corresponding positive one in case policymakers raise rates.
EUR/USD surged from near the 1.1170 (S2) support territory after Merkel’s comments, breaking above the resistance (now turned into support) level of 1.1230 (S1), before finding fresh sell orders near 1.1270 (R1) and subsequently pulling back somewhat. Given that the price structure on the 4-hour chart remains higher peaks and higher troughs, we would expect the bulls to seize control again soon and push the rate higher for another test near 1.1270 (R1). If they manage to overcome that resistance level, they could initially aim for the 1.1300 (R2) area, marked by the peak of the 9th of November.
Today’s highlights:
During the European day, we get the preliminary manufacturing and services PMIs for May from many European nations and the Eurozone as a whole. Most of these indices are expected to have remained unchanged or to have ticked down, but to still remain at elevated levels. Thus, despite some marginal declines, such prints could indicate that the bloc’s economic recovery remains on track, and may enhance further speculation regarding an increasingly more optimistic ECB. Something like that could bring the euro under renewed buying interest.
EUR/JPY spiked higher after the German Chancellor’s remarks as well, to break above the resistance (now turned into support) obstacle of 124.60 (S1). The rate hit resistance at 125.30 (R1) and then retreated. In case the PMIs are encouraging today, we could see the pair surge and perhaps test the 125.30 (R1) zone again, where a decisive break could pave the way for the 125.80 (R2) resistance territory.
We also get Germany’s Ifo survey for May. The forecast is for both the current conditions and the expectations indices to have risen, albeit marginally. The case for an increase in these figures is supported by similar upticks in the ZEW indices for the month. Coming on top of potentially encouraging PMIs, this could be another factor that enhances the case for Draghi & Co. to shift to a more hawkish tune soon.
In the US, the preliminary Markit manufacturing PMI for May and new home sales for April are due out, though neither of these indicators is usually a major market mover.
We have three speakers on the agenda: BoE Governor Mark Carney, ECB Executive Board member Benoit Coeure and Minneapolis Fed President Neel Kashkari.
EUR/USD
Support: 1.1230 (S1), 1.1170 (S2), 1.1100 (S3)
Resistance: 1.1270 (R1), 1.1300 (R2), 1.1340 (R3)
EUR/JPY
Support: 124.60 (S1), 124.00 (S2), 123.00 (S3)
Resistance: 125.30 (R1), 125.80 (R2), 126.50 (R3)
