- EUR prints a two-month high
- German bund yield correction continues
- U.S. ISM manufacturing PMI could cause problems in thin conditions
- U.K. manufacturing PMI hurts the pound’s expectations
This time last year the euro nearly dropped through its one-month low of €1.3800. A year on, the single unit is again making some significant strides, albeit from much different price levels.
The EUR has started the month of May climbing to a new two-month high against the dollar on Friday (€1.1258), again extending its recent rebound outright in quiet European holiday trade.
The European Central Bank’s (ECB) €60 billion-a-month bond-buying stimulus program managed to push the common currency down below the psychological €1.05 handle only six-weeks ago. With the market so bullish on the timing of a Federal Reserve rate hike, many investors had expected that it was only a matter of time before the EUR would trade at parity.
The European-U.S. interest rate divergence argument (a hawkish Fed and a dovish ECB) has seen investors plough into the short EUR, long USD positions for months. So much so, that +78% of all forex long dollar positions had been against the euro. The one directional, lopsided trade was always going to be in danger if any of the parameters suddenly changed.
Inconclusive Data Keeps Investors Guessing
A string of weak U.S. economic data releases in April (gross domestic product, business investment, nonfarm payrolls) attributed to the dovish shift in Fed expectations. This change in sentiment initiated the broad dollar weakness, which has been supported by the assertive rally in German bund yields this week.
The ECB’s aggressive quantitative easing program has encouraged investors to own core eurozone bonds and stocks, alongside a massive build up in EUR short positions. The 10-year German bund has managed to back up +25 basis points as investors’ appetite for fixed income with a negative or flat return diminishes.
The loss in fixed income has pressured the DAX, and in turn, has encouraged some aggressive EUR/USD short covering. The rise in German yields is also encouraging investors to consider switching from EUR to JPY as the funding currency of choice.
Despite the European bond markets being closed for the May Day holiday – forex trading is open — there is little evidence that this week’s correction wants to come to an end. The dollar is weaker against most Group of Seven currencies. Against the EUR, crucial technical pivots remain intact (€1.0860 week’s low and €1.1320), and strong EUR offers are understood to be placed ahead of €1.1300 (option barrier protection). Above this level with momentum, a plethora of stop-losses are rumored to be parked, potentially opening the way for the February 3 high of €1.1534.
Speculators, or “hot” money, have been buoyed by yesterday’s better-than-expected U.S. data (initial weekly claims and employment cost index). They are keen to re-enter their mostly closed out EUR short positions as the data has boosted expectations for next week’s nonfarm payrolls report. However, today’s U.S. Institute for Supply Management’s manufacturing purchasing managers’ index (PMI) may have something to say about that (52 versus 51.5). It is been released in ultra-thin conditions, which tends to exaggerate forex price moves.
U.K. Manufacturing Takes a Hit
Month-end EUR/GBP (€0.7360) buying yesterday was a prime factor in the euro’s gains, and because of event risk, next week’s U.K. election is expected to keep the cross relatively perky.
Disappointing data out of the U.K. this morning has been lending a helping hand to keep pressure on sterling. Outright, the pound is again eating through the bids at £1.5300 on the back of the U.K. manufacturing PMI miss (51.9 versus 54.6 expected — the lowest in seven months).
A print like this would suggest that the U.K. economy wouldn’t be recovering quickly from its surprisingly sharp first-quarter slowdown. Digging deeper, the data insinuates that U.K. manufacturing is going to have a tough go of it over the coming months – new orders are sliding, particularly on the export front due to the EUR/GBP underperforming. This is not good news for either Prime Minister David Cameron ahead of next week’s election, nor for the hawks advocating a U.K. rate hike before 2016.
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