Rising US bond yields have helped boost the US dollar against the yen (USD/JPY) over the past 24 hours but it wasn’t as positive a picture against other currencies as the single currency continued to rise across the board shrugging off a litany of negative factors to trade higher against a range of currencies on expectations of an increase in interest rates at next weeks ECB rate setting meeting.
The negativity from rising peripheral countries bond yields as well as ratings downgrades for Greece and Portugal have been more than offset by these higher interest rate expectations, when European rates look set to be increased from their current levels of 1% to 1.25% next Thursday.
The pound remained fairly unmoved after UK final revision of Q4 GDPimproved only slightly to -0.5%, while real household income also fell by the same margin, the first annual drop since 1981, highlighting the fragile nature of the British consumer.
This expectation that continued weak economic data will weigh on the pound relative to the euro is likely to weigh on Bank of England rate deliberations at next week’s rate setting meeting and possibly weigh on future rate rise expectations in the short term.
In the US the beginning of an important number of data releases related to the US jobs market starts today with the ADP employment report for March, which is expected to show a net gain of 205k jobs, down slightly from February’s 217k.
A more hawkish tone, as we approach the scheduled June expiry of the bond buying program, from various Fed officials is also starting to seep into market with the Dallas Fed’s Fisher saying he would vote against further QE, while non-voting St. Louis Fed president Bullard suggested a curtailment of the program.
The Fed’s program has certainly been a hot button topic with G20 countries over the past few months and today’s one day G20 summit in Nanjing will be the first meeting of the G20 since the G7 intervened in the currency markets to undermine the yen.
Amongst some of the topics up for discussion will be central bank interventions with respect to monetary policy as well as further talks with respect to how to deal with global trade imbalances.
EURUSD– still in the same range with downside so far limited to around the key support area at 1.4020/30. While above here the single currency remains susceptible to further rallies towards 1.4160, trend line resistance from the 1.4250 highs last week. We need to see a drop back through the 1.4020/30 to re-test the 1.3850/60 level. The larger long term trend line resistance remains around 1.4300/10, which can be drawn from the all time highs at 1.6040 in 2008 remains a key barrier and if broken could well target a strong rally to 1.4580 and the 2010 highs.
GBPUSD– cable continues to remain underpinned below 1.5965 but until we can get back above 1.6070/80 sterling bears still have the initiative here. To stabilise we would need to see the pound close back above the 1.6020/30 level. Even though we matched the weeks low around 1.5940 yesterday the lack of follow through leaves the pound susceptible to pullbacks. Having broken below the 55 day MA at 1.6090 the onus now shifts to the downside. The pound now needs to get back above 1.6090 to stabilise and re-target the 1.6180 level. Two successive daily dojis keeps the balance between bulls and bears finely balanced and a close below 1.6000 has the potential to target a move back towards 1.5800/20 which is also trend line support from last year’s lows at 1.4230.
EURGBP– another new high this week at 0.8833 as the single currency grinds relentlessly higher, but again the single currency was unable to follow through with any conviction. However while the single currency is able to hold above 0.8750 level the risk remains for a re-test of the highs of 2010 around 0.8940. For now the air continues to remain a little thin above 0.8820, and a failure here could well see a slide back towards the long term trend line now around 0.8720.
USDJPY– the post intervention highs at 82.00 finally gave way yesterday and the subsequent close above the 55 day MA at 82.15 shifts sentiment towards the highs this year around 84.00. Having also taken out the resistance level around the 82.60 area, which is trend line resistance from the 2010 highs at 94.98 the stage looks set for a re-test of the highs this year. Support now lies around the 55 day MA around 82.15 as well as the post intervention highs around 82.00. The key support remains around the 80.70 area which has been the lows post intervention so a break below here could well see the market look to test the resolve of the central banks in trying to defend the psychologically important 80.00 level.