The EUR to USD exchange rate has fallen below the range highs, potentially signally a resumption of its previous range-bound trend.
EUR touched a high of 1.1476 last Friday before dropping quickly to close unchanged for the day at 1.1406, where we find the currency at the start of the new week.
The break above 1.1450 seen last week was significant in that it had some speculating that the euro was about to break into an uptrend, but the break was apparently false.
The possibility remains that the break was real and the exchange could yet rally higher again; likewise the shooting start on the weekly chart calls into question its validity as it signals a reversal to the downside.
Friday’s payroll miss was not definitive enough to reinvigorate the bullish trend - nor was it strong enough to support expectations of a June rate hike – if anything it only increased uncertainty.
The currency is still in the 1.14s and has now popped back under almost all the previous range high highs, most of which fall in-between 1.1420 and 1.1470 range.
This argues that the break has now pulled all the way back into the range-proper.
If so, this augurs negative for the pair in the near future and raises the possibility of a full scale breakdown back towards the 1.04-5 range lows, or intermediates along the way.
"Indicators are mostly neutral and the current movement is viewed as part of a consolidation phase. In other words, expect sideway trading for today, likely between 1.1360 and 1.1450," says Quek Ser Leang at United Overseas Bank in Singapore.
I however believe a break below 1.1386 would be key in establishing a new down-trend, and until that happens we remain cautiously bullish.
Such a move lower, however, would signal a reversal of peak and trough progression on the 4-hour chart, which is normally the first sign the dominant trend is cracking.
According to online broker Hantec’s Richard Perry we are now firmly back in the old trading range and, “once more we must view the old long term range resistance at $1.1465 as resistance, whilst a breach of $1.330 opens the key reaction low at $1.1215.”
Analyst Yann Quelann of online bank Swissquote, on the other hand, retains a firmly bullish view in the short-term, seeing the pair rising within an ascending wedge. However, over the medium and long-term he is more bearish:
“Expected to show further increase within the uptrend channel… In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.”
Commerzbank’s Karen Jones is currently ‘short’ the pair (which means profiting from downside) after failure at the upside of two channels in the upper 1.16s. She sees more downside from here on:
“The break below 1.1465 (April 2016 high) further alleviates upside pressure and we look for further weakness to initially the 3-month support line at 1.1327. Failure here will target the 1.1216 April trough.”
US Data: No Cigar for Dollar Bulls
The dollar has the ‘maths’ in its favour in May, according to Kathy Lien of BK Asset Management, who notes there is a 60% statistical probability of the dollar rising in the month, and an even higher 80% probability of it rising versus the euro, although the sample is only 10 years.
The currency reversed a losing streak after comments from Fed officials revived expectations that the Federal Reserve may increase interest rates in June, however neither of the two Fed officials actually have the right to vote on the FOMC.
The other reason given for the sudden about-turn was that the dollar short trade had become ‘overcrowded’ and the excess of traders who had sold the dollar meant there was a market imbalance.
Whilst it’s true that market peaks and troughs tend to be accompanied by overcrowded positions, at these levels it’s hard to believe there was no-one left willing to buy euros at 1.1670.
Anyhow, regardless of the logic, it seems the signs were there in the excess positioning.
Friday’s Non-Farm Payrolls result was marginally disappointing but not a game-changer.
The lower-than-expected 160k print (202k exp) was offset by a higher-than-expected two basis point rise in annualized take home pay (rising to 2.5% versus 2.4% exp, 2.3% prev), however, the monthly earnings figure remained static at 0.3% - so no cigar.
ING Bank’s Viraj Patel also makes the point that the dollar’s whipsaw back up, may have been a reflection of the market has, in recent months, become overly pessimistic about the US economy and at the same time overly optimistic about the ‘rest of the world’.
If true, this would appear to favour yet more dollar gains as the ‘warped’ view is righted.
The euro, meanwhile, may not be one of the currency’s which markets are being overly optimistic about, given the 0.6% growth rate in euro-land in Q1 was a cold, hard fact and compared favourably to the US’s 0.5%.
Still there are those who argue the US print was a seasonal anomaly, and it is true you have to go back to 2004 for a Q1 which was higher than the previous Q4.
Also, the euro’s lower inflation result was brushed off as a mere statistical discrepancy as inflation is expected to rise again in Q2 and Q3.
It still is the case that unless these expectations are disappointed the ECB is likely to stay on hold, given what Draghi said about more rate cuts being extremely unlikely.
As such analysts have argued there may be a ‘floor’ on the euro, as there is no major catalyst for more downside. In the end its probably all going to be down to inflation.
Data hotspots in the Week Ahead
This week, we receive a lighter flow of US data.
The highlight comes on Friday May 13 when Retail Sales for April is released, and expected to rise by 0.7% (-0.4% prev) mom, and Core by 0.5% (0.1% prev).
Also out on Friday are Producer Prices for April, which are forecast to rise by 0.3% from -0.1% in March.
For the Eurozone it is a relatively quiet week for big headline releases, with the most notable being German Q1 GDP on Friday May 13, with expectations being that it will follow the Eurozone registering 0.6% increase from 0.3% in Q4.