In the lead up yesterday’s European Central Bank (ECB) meeting in Frankfurt, market commentators were split on how ECB chief Mario Draghi would address the recent stream of weaker Eurozone (EZ) economic data.
That question sharpened as the EZ composite PMI printed at its weakest level since June 2013, just five hours before Mr Draghi’s press conference was scheduled to start.
By the time Mr Draghi took the podium, the EUR/USD had slipped to 1.1340. As the NY session drew to a close, Forex traders had pushed the single currency down to 1.1288; its lowest level since mid-December versus the USD.
It’s been our base case that the ECB will hold lending rates at current levels for an extended period, and, are more likely to initiate another round of targeted negative rate loans, than to lift their benchmark deposit rate above the zero bound.
And even though Mr Draghi deftly deflected questions about the timing and size of any new extraordinary stimulus measures, one look at the Treasury curves of the EZ’s largest members illustrates the entrenched negative yield structures.
For example, France offers negative Treasury yields out to five years, Austrian and Dutch yields are negative out to six years, German Treasuries have negative yields out to eight years and investors would have to loan money to the Swiss Government for more than 10 years before earning a positive yield.
The point is that outside of direct zero interest loans to EZ banks, the ECB has very few policy transmission mechanisms to boost the sagging EZ economy. Further, any plans to normalise the EZ’s interest rate structure will likely be on hold until 2020, at least.
On balance, we see scope for EUR/USD to continue to trend lower throughout the year. However, we don’t expect the trade to be one-way-traffic and support levels will be found for periodic corrections higher.
With the US FOMC meeting next week, we could be approaching some transitory support levels in the near-term near 1.1225.
Our trade suggestion to sell EUR/USD at 1.1425 was not filled, which leaves us short from 1.1465. We suggest holding short from 1.1465 with an initial target of 1.1225 and a 1.1475 stop.
The GBP/USD hit a three-month high of 1.3140 during today’s Asian session, as the possible delay of the March 29th ” Hard Brexit” date continues to favour the Sterling bulls. The technical picture is looking overbought with the daily RSI near a five-month high of 67.00.
Our trade suggestion to sell the GBP/USD at 1.2880 was stopped out at 1.2975 for a 95 point loss. We suggest short-term traders look to sell GBP/USD at 1.3155, with an initial target of 1.2820 and a 1.3260 stop.
Yesterday’s domestic jobs report proved to be a significant inflection point for the Aussie dollar. The AUD/USD spiked to .7165 after the higher-than-expected print of 21,600 new jobs.
However, since all the job growth was temporary and full-time jobs actually fell by 3,000, the pair posted an “outside reversal” lower and traded down to .7075 in the Asian session.
We are currently short from .7155 and suggest holding short into the weekend with an initial target of .6865 and a .7180 stop.
The 110.00 level in the USD/JPY is still holding as resistance and our trade suggestion to sell at 110.60 has not been filled, which leaves us flat the pair. We have noticed that the recent gains in USD/JPY have been as US 10-year yields have been falling, not rising.
As such, we suggest medium-term traders continue to look to sell USD/JPY at 110.30 with an initial target of 108.20 and a 111.45 stop.
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