Foreign Exchange News
23 May 2014

USD Caught In No Mans Land

EUR/USD             1.3632

GBP/USD             1.6855

GBP/EUR             1.2365 (0.8088)

EUR/CHF              1.2210

GBP/CHF             1.5098

GBP/AUD            1.8247

 

The carry of positivity from yesterday’s Asian session was somewhat tepid, yet European stocks did manage to edge marginally higher following somewhat mixed PMI data. The cautious positivity carried through into the US session with stocks advancing; although not quite troubling recent record highs despite indication manufacturing continues to expand. Overnight the AUD was a minor out-performer, buoyed by a firmer risk environment and desire for yield.  The EUR is poised to face its third straight week of declines as EURUSD particularly sits on the precipice of a major breakdown.

 

We’ve discussed US dollar issues a lot here recently and the greenback appears stuck in no man’s land as central banks battle it out via policy. We’re not suggesting currency wars have reared their head again, but in an environment where major central banks have interest rates at all-time lows, expectations can have greater impacts that traditional catalysts. This is where the dollar is stuck, the consistent scaling back of QE in the US signals that in time we will see some form of policy normalisation from the Fed, therefore it is difficult to be outright bearish on USD. Yet if we are to look at FOMC minutes and comments from a somewhat dovish Fed Chair Janet Yellen, rates are set to remain at record lows and accommodative for some time yet, which makes a bull case difficult to argue.

 

The greenback has moved away somewhat from its position in the “risk” trade, the USD trades close to six month highs at a time when US stocks trade near record highs. The interesting point across markets is the lack of volatility. The push higher in equities doesn’t have huge volume behind it that would be supportive of a confident bull market. This certainly leaves the equity bull market in a tricky position, especially if confidence in the move is lacking. A reversal in the equity bull run could well see the greenback retain its safe haven status, but for now no man’s land continues to keep the USD pinned down.

 

We discussed Eurozone PMI’s  in yesterday’s commentary and if anything further supported calls for ECB action. The prospect of some form of stimulus in two weeks is a constant weight on the EUR but the steady run of weaker data just adds weight to the negative EUR conviction. There is still evidence of a two paced European economy but even the core in Germany has shown signs of a slowdown.  The German GDP revision was released this morning for Q1 and confirmed .8% growth through the quarter. German IFO gauge of business confidence data has posted figures worse than expected; this has weighed further on the EUR which is continuing a three week decline.

 

EURUSD has closed below the key 200 day moving average for the first time in 8 months. A further close below this level into the weekend leaves the single currency in a very fragile position with scope for a larger move back below 1.3500. The next level of support lower is at 1.3560. EURGBP has confirmed its move back below .8100, the next level back lower is at .8030 with the key .8000 figure looming below.

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