There must be some truth in ‘an apple a day keeps the doctor away.â€™ Well the EUR bulls would like to believe that. After hours trading yesterday saw Apple earnings release give the risk market some freedom to roam higher. Roam is too strong, probably feel its way higher, but remain in this well defined EUR range ahead of the FOMC release. Trader stops and Mideast buying has been able to lift the â€˜singleâ€™ currency to these o/n session highs. The bear continues to rely on EU supranational and government names to sell into this rally where significant EZ/Bund tightening spreads support these gains. Todayâ€™s focus will be on the FOMC projections.
Will the Fed policy team allow the EUR to get too far ahead of itself? The earlier rate release will see no change of the O/N funds rate. Itâ€™s the updated economic and funds rate projections along with helicopter Benâ€™s press conference that is going to create all the trading fuss. The FOMC statement language is expected to remain largely the same. Maybe a tweak where they might mention the recent moderation in labor market improvement and renewed strains in global financial markets. Itâ€™s the â€˜official projectionsâ€™ that are capable of offering potential â€˜hawkishâ€™ surprises. The whisper is that maybe one or two of the FOMC officials, in the hawkish minority camp, might have brought forward their call for the first Fed rate hike. The 2014 guidance is not irrevocable, but expected to remain.
Rational distribution of expectations is likely to shift towards an earlier hike. A new theme that appears to be coming to the fore amongst G10 members. In this scenario, the US fixed income class would see shorter term yields creep high, a bias for the dollar against the EUR and probably more so against the JPY ahead of this Friday’s BOJ policy announcement. Quick spec money is likely to prefer a lower dollar ahead of the FOMC statement and Benâ€™s conference. The market remains short EURâ€™s and if Ben talks the US economy down, the following short squeeze will have the weaker EUR shorts positions taken out of the game. The techs see the market bias within the three-month range remaining bearish. Investors continue to sell upticks looking for a short-term run into the 1.30â€™s. Everyone knows that this market is oversold, however, someone has yet to provide a compelling reason to change current market strategies.
UK data this morning confirms that the British economy has officially slid back into recession in Q1. GDP shrank -0.2% in the first three months, complementing the -0.3% fall in Q4. Cable never stood a chance, unlike Gilts which are in demand this morning. This will certainly put Finance Minster Osborne austerity drive in the firing line. Critics believe that his aggressive tax hikes and spending cuts can only simply strangle growth. The BoE was already signaling that the UK was probably in a recession. To date, they have been promoting that the economy is healthier than data suggests. The market knows that there is room for revisions to the numbers given that they are early estimates. However, will they be large enough to make the double dip go away? The BoE may not be able to look through the numbers and may have to respond with QE.
Will a change of guard be about faith in the EUR project? The Dutch freedom party believes that the September election would be a referendum about sovereignty and Europe. Sarkozy is certainly under pressure and possible to be ditched by France in favor of Hollande, who has irked Merkel, and who herself faces the electorate next year. With the Irish referendum and the Greek going to polls around the corner, collectively these elections will be seen as a vote on the EUR project.
EUR Relief Rally without Teeth
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