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EUR And GBP Trim Gains, FOMC In Focus

Published 04/27/2015, 06:47 AM
Updated 04/25/2018, 04:10 AM

FOMC decision and US earnings in focus

We are heading into an event full week for the G10 complex. The central bank decisions will be in focus this week. The Federal Reserve (April 29th), the Bank of Japan and the Reserve Bank of New Zealand (April 30th) will all deliver verdicts. Even if all three banks are expected to maintain the status quo, the accompanying statements should give fresh direction to the FX markets.

In the stock markets, Nasdaq Composite Index rallied to a new record high (5100.371) in New York on Friday after Microsoft (NASDAQ:MSFT) EPS beat market estimates (Q3 EPS ex-items $0.61 vs $0.53 exp.) and Google (NASDAQ:GOOGL) announced 14% increase in first quarter revenues. The US earnings remain in focus this week: Apple (NASDAQ:AAPL), Universal Health Services (Mon), Ford Motor Company (NYSE:F), Merck (NYSE:MRK), UPS, Whirlpool (NYSE:WHR), Bristol-Myers Squibb Company (NYSE:BMY), Kraft Foods (NASDAQ:KRFT) (Tue), Mastercard Incorporated (NYSE:MA), The Goodyear Tire & Rubber Company (NASDAQ:GT), Noble (Wed), Colgate-Palmolive Company (NYSE:CL), Exxon Mobil Corporation (NYSE:XOM), Coca-Cola Company (NYSE:KO), American International Group Inc (NYSE:AIG) (Thu), Chevron (NYSE:CVX), Moodys Corporation (NYSE:MCO), CVS Health (NYSE:CVS) (Fri) are among the companies under watch.

Following the busy earnings week and the mixed results in the US, we are impatient to acquire an official insight from the FOMC regarding the US economic outlook. The implied volatilities extracted from the sovereign bond markets currently price in the first Fed rate hike by December (vs Jun/Sep formerly). This gives room for hawkish readjustment in Fed expectations, should the Fed sound optimistic regarding the US economic recovery at this week’s meeting.

Greece: not a done deal yet

As suspected, no fireworks came out of Friday’s Eurogroup meeting. According to Greek PM Dragasakis, “there is potential and an imperative need for an interim deal to be concluded in the first days of May, if not within April”. Greece should pay 1 billion euros to IMF in May and the uncertainties prevail despite Greece’s will to honour its obligations.

EUR/USD sees resistance at 50-dma (1.0896) as last week’s enthusiasm is somewhat fading. Given the pending political questions, we stay neutral on EUR/USD within 1.1080/1.0458 range. This week’s FOMC should set the tone in the short-run. The option bets are mixed at 1.08, puts dominate below 1.08, and calls take over above 1.0865.

EUR/JPY consolidates gains above the daily Ichimoku baseline (128.80). As the positive trend gains traction, the pair is now ready to step into the daily Ichimoku cloud cover (130.45/134.14). However, the upside remains a challenge first because the market will certainly remain reticent to push for fresh EUR-longs given the Greek headline risk. Second, the BoJ is expected to maintain the monetary policy outlook unchanged at April 29th meeting and a BoJ-on-hold is an insufficient catalyst for an easy positive push. Fitch downgraded Japan to A this Monday due to “insufficient structural measures”. The Abenomics took another hit and the waning support in Abe’s strategy requires new solutions. Technically, a failure to break above 129.80/130.00 (optionality / Fibonacci 50% on April 6-14 drop) should pave the way to 126.50/124.50 (a year low).

Cable tops at 100-dma

Cable tests the 100-dma (1.5180), which has acted as a solid resistance since Aug’14. As we step into the critical two week period before May 7th general elections in the UK, traders are expected to refrain from building fresh GBP/USD positions. A failure to clear resistance at 1.5200/25 should signal the end of two-week rally and push the GBP/USD into a short-term bearish consolidation zone and favour a downside correction down to 1.5045/1.5000 area.

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