EUR/USD On Its Way To 1.08 As The Greenback Loses Momentum

News and Events:

EUR upside is still limited… for now

The single currency had a nice ride after the last FOMC meeting and the dovishness of Fed members regarding the pace of rate normalisation. However, the easing political uncertainty that stems from the rise of populism across EU members has also helped the EUR to get some colour back. The game is not over yet as the French election remains the major hurdle for further EUR appreciation. Since yesterday evening, EUR/USD has been testing a key resistance area at between 1.08 and 1.09 (previous highs and 200dma that currently stands at 1.0896). We do not expect a clear break of these levels before the French election; however the market will be extremely sensitive to upcoming economic data from the US as it could slow down the Fed tightening path.

As we approach the first and second rounds of the French elections, the classic safe haven currencies – CHF and JPY – should perform well against the backdrop of political uncertainty and doubt about the strength of the US economic recovery.

Yields Seeking Dominates in FX

The USD continues to lose ground as US yields back off highs following the dovish Fed. EM FX has gained meaningfully against the USD (marginal pause today) while G10 currencies are less directional. The broad sentiment is that markets are again in a “goldilocks” phase with accommodating monetary policy dominating and political risk emulating from the US and European deceleration. With the Fed keeping the Dots unchanged and PVV’s disappointing result in the Dutch elections, investor’s short-term fears have faded. FX volatility as shifted lower giving investors renewed reason to changes yields. We are concerned that the market is underpricing the probability of the Fed rate hiking cycle continuing in June. In FX, carry and momentum trades are positing significant risk adjusted returns. Buying of EURUSD has increased popularity as shallow Fed policy path seem to collide with ECB tightening in September. As we have stated in numerous forecasts it is unlikely that the dollar will dominate 2017. Trading long EURJPY would be the highest conviction strategy for this Fed/ECB convergent trade. This weekend, the G20 finance ministers and central bank will meet. In broad terms, the G20 has had time finding consensus or to provide real solutions making for a limited statements. Given the concern with the rise of populism and protectionism there will clearly be some notable headlines heading over the wire. However, it’s unlikely any splashy comments will have a lasting market impact. Specific focus will be on US Treasury Secretary Mnuchin regarding USD policy and global trade. On the surface Mnuchin has indicated a comfort level with a stronger USD yet should the Fed trigger global rotations into USD we suspect that administration will act. When the hype from the G20 clears on Monday we should see a “greenlight” for extensive risk taking. On the docket today US will release industrial production and Michigan sentiment which are both expected to see further improvement.

UK unemployment falls to 42-year low

What a contradiction! The expected economic nightmare triggered by the Brexit vote has not materialised. Indeed, unemployment rate has reached its lowest level in 42 years at just 4.7%. It seems that at least for now, the UK economy is not the worse off from its decision to exit of the European Union. Nonetheless, it is worth noting that pressure on wages are almost non-existent. In our view, the lack of job security (for example with the zero-hour contract) is also pushing unemployment rate to go lower.

Earlier this week, the BoE decided to keep its interest rates on hold at 0.25%. It is clear that Brexit fears are definitely helping the central bank as the pound remains weak. We maintain our bullish view on the pound and we see European uncertainties growing in the medium term, in particular given the French Elections.

When looking more specifically at data, inflation is on the rise and we should see the BoE hinting to further tightening in the future. The triggering of the article 50 looms and negotiations are likely to last longer than expected as trade agreements are paramount for the future UK competitiveness.

Today’s Key Issues (time in GMT):

• Jan Trade Balance EU, last 124m, rev 57m EUR / 09:00
• Jan Trade Balance Total, last 5798m, rev 5730m EUR / 09:00
• Jan Trade Balance SA, exp 22.0b, last 24.5b EUR / 10:00
• Jan Trade Balance NSA, last 28.1b EUR / 10:00
• Mar IGP-M Inflation 2nd Preview, exp 0,22%, last 0,02% BRL / 11:00
• Jan Manufacturing Sales MoM, exp -0,30%, last 2,30% CAD / 12:30
• Feb Industrial Production MoM, exp 0,20%, last -0,30% USD / 13:15
• Feb Capacity Utilization, exp 75,50%, last 75,30% USD / 13:15
• Feb Manufacturing (SIC) Production, exp 0,50%, last 0,20% USD / 13:15
• Mar P U. of Mich. Sentiment, exp 97, last 96,3 USD / 14:00
• Mar P U. of Mich. Current Conditions, exp 111, last 111,5 USD / 14:00
• Mar P U. of Mich. Expectations, exp 87,1, last 86,5 USD / 14:00
• Mar P U. of Mich. 1 Yr Inflation, last 2,70% USD / 14:00
• Mar P U. of Mich. 5-10 Yr Inflation, last 2,50% USD / 14:00
• Feb Leading Index, exp 0,50%, last 0,60% USD / 14:00
• 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00
• Feb Labor Market Conditions Index Change, exp 2,5, last 1,3 USD / 23:00
• ECB’s Coeure takes part in G-20 meeting in Baden-Baden EUR / 23:00
• Feb Industrial Production YoY, exp 1,30%, last 2,30% RUB / 23:00
• Feb Tax Collections, exp 93044m, last 137392m BRL / 23:00

The Risk Today:

EUR/USD keeps on strengthening. The pair is lying in an uptrend channel. Key resistance is still given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is moving up but the pair remains around support given at 1.2254 (19/01/2017 low). The road is still wide-open for further decline. Hourly resistance is given at 1.2300 (05/03/2017 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high). Hourly support given at 113.56 (06/03/2017 low) has been broken. Yet the pair is moving sideways. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF keeps on weakening since the pair has exited uptrend channel. Hourly support is given at 0.9862 (31/01/2017 low) has been broken. Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.