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by Charalambos Pissouros

EUR Continues to Recover as ECB Rhetoric Reinforces the Idea of a “Live” June Meeting

 

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EUR Continues to Climb North on ECB Remarks

The euro outperformed all the other G10 currencies on Wednesday, with the main losers being CHF, AUD and CAD. The currencies against which it gained the least were the Nordics, NOK and SEK.

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The common cyrrency continued to climb north on Thursday as hawkish remarks from several ECB officials reinforced the idea that next week’s ECB meeting will be a “live” one. Remember that on Tuesday, a report suggested that next week, policymakers are likely to hold a discussion that could end up with an announcement on when they intend to end QE purchases.

The chorus started with the central bank’s chief economist Peter Praet, who said that “Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases”. Then, Jens Weidmann, the head of the German central Bank, said market expectations that the ECB could wind down its QE program by the end of the year were “plausible”. Klaas Knot, the President of the Dutch central bank, noted that the ECB should wind down QE as soon as possible, while his Estonian counterpart, Ardo Hansson, suggested that interest rates may start to rise faster than investors expect.

Heading into next week’s meeting, ECB speeches are likely to stay in the spotlight and with more hawkish rhetoric, it will be very difficult for Draghi to sound dovish. At the press conference following the latest meeting, he noted that officials have not discussed plans for the June meeting, which combined with the latest turmoil in Italy’s political landscape, convinced market participants that the Bank is likely to refrain from making any QE announcements in June. The July meeting seemed to be a much more likely candidate for such a move. However, the easing tensions in Italy, the rebound in inflation to the ECB’s inflation goal, and most importantly yesterday’s remarks by ECB officials, seem to have changed investors’ minds. Thus, the absence of any QE announcement, or at least some hints, at the meeting could come as a disappointment and perhaps cause the euro to give back its latest ECB-related gains.

As for Italy, after winning a confidence vote in the upper house on Tuesday, the new government secured victory in the lower house as well yesterday. Although uncertainties surrounding the nation are far from eliminated, as we already noted yesterday, we expect politics to stay in the back seat as monetary policy developments are likely to keep euro-traders busy for a while.

EUR/JPY – Technical Outlook

We have been observing this strong rally in the EUR/JPY since the pair reversed to the upside on the 29th of May. This steep uprise managed to place the pair back above the upwards moving trendline, drawn from the 18th of August last year. Certainly, this could be seen as positive and we could see the bulls driving EUR/JPY higher. One thing to note is that the pair is still below its long-term downwards moving trendline, running from the 2nd of February, so the upside could be limited.

For now, we will stick to the upside potential, at least in the short run. A strong move back above the 129.80 level could open the path towards the next key area of resistance at 130.20. If more buyers start joining in, then EUR/JPY could travel all the way to the 131.20 or even the 131.40 levels, where the pair could also meet the aforementioned downwards moving trendline and test it from underneath.

Alternatively, if EUR/JPY decides to make a move back below the previously mentioned upwards moving trendline, then this could worry the buyers, who could step away for the time being. The bears could take control and drive the pair towards the 129.00 level, where EUR/JPY could meet the tentative upwards moving support line, taken from the lows of the 29th of May. Certainly, EUR/JPY could bounce back up from there, but if that support area doesn’t hold, then this could open the path towards the 128.55 zone, or even lower to the 127.80 mark.

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EUR/AUD – Technical Outlook

Looking at the bigger picture, EUR/AUD continues to trade, not only below the short-term downwards moving resistance line, drawn from the peak of the 25th of April, but also below the long-term upwards moving trendline, taken from the lows of 22nd of February 2017. All this doesn’t look very promising for EUR/AUD in the longer-term. In the short-term, considering the recent strengthening of the Euro, we could see a bit of more recovery in EUR/AUD.

We will prioritise the short-term scenario and aim for a corrective move higher. A good break above the 1.5425 barrier could trigger some more buying from the market participants and we could see the pair hitting the next key level of resistance of 1.5500, or even the next one at 1.5530. A move above the last level could open the way for a test of the aforementioned downwards resistance line, a break of which could bring in even more bulls into the game.

The upside scenario is also supported by the RSI and the MACD, which are both showing signs of positive divergence. What’s more, the RSI is above its 50 line and the MACD has shifted from its lows and is now hitting its 0 mark.

On the downside, a move back below the 1.5395 zone could be seen as a sign of weakness coming back. If the pair continues dropping towards the 1.5315 mark, then the bulls might start abandoning EUR/AUD, which will allow the bears to take full control and drive the pair towards the Monday’s lows at 1.5270 area. A break below that could open the path towards the 1.5155 level.

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As for Today’s Events

The calendar appears to be relatively light. During the European morning, German factory orders for April are forecast to have rebounded to +0.7% mom from -0.9% in March, while Eurozone’s final GDP for Q1 is expected to confirm that the Euro area economy slowed to +0.4% qoq in the first three months of 2018 from +0.6% qoq in Q4 2017.

From the US, we get initial jobless claims for the week ended on the 1st of June. Expectations are for claims to have risen somewhat, to 223k from 221k the previous week. This will drive the 4-week moving average fractionally higher, to 222.40k from 222.25k

In Canada, the BOC will release its Financial System Review Report.

Tonight, during the Asian morning Friday, we get final Q1 GDP data from Japan. Expectations are for the final print to confirm the preliminary estimate and show that the Japanese economy contracted 0.2% qoq in the first three months of the year. The nation’s current account balance for April is coming out as well.

From China, we get trade data for May. Expectations are for the nation’s trade surplus to have declined to USD 32.5bn from USD 28.4bn. Both the nation’s exports and imports are forecast to have slowed to 6.3% yoy and 16.0% yoy, from 12.7% and 21.5% respectively.

As for the speakers, we have two on the agenda: BoC Governor Stephen Poloz and BoE Deputy Governor for Markets and Banking Dave Ramsden.

 

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