Euro and Swiss Franc ended the week as the strongest major currencies. Inflation data from Eurozone lessened the pressure on ECB to expand stimulus. Also, the markets seemed to be relatively confidence that Greece could eventually strike a deal with international creditors before running out of cash. Both factors provided support to the common currency, in particular in crosses. Yen ended as the weakest major currency as BoJ lowered growth and inflation forecast. New Zealand dollar closely followed after RBNZ signal easing bias. Meanwhile, Sterling was also under some selling pressure and ended as the third weakest major currency after weaker than expected Q1 GDP reading. Traders were also getting cautious ahead of UK election this week. Dollar was under much pressure for most of the week on weak economic data, especially Q1 GDP, but rebounded strongly on Friday and ended the week mixed.
The common currency was somewhat lifted by data showing the Eurozone exited deflation with CPI back at 0% yoy in April. Extended rebound in crude oil, reaching as high as 59.9 also helped supported Euro. ECB also said in the monthly bulletin that after having reached low levels in mid-January, Longer-term inflation expectations in the euro area have recovered." It's a consensus that Eurozone is not out of deflation risk yet just because of one month's CPI reading. Nonetheless, there would be clearly much less pressure for ECB to expand the monthly bond buying program. Meanwhile, the negotiation between Greece and international creditors seemed to have improved after prime minister Alexis Tsipra reshuffled the team. The team leader, deputy prime minister Yannis Dragasakis said that a "minimum" agreement could be reached soon on actions that could be taken immediately. And that would all Eurozone finance minister to endorse the deal at the next meeting on May 11 and release the fund Greece needed.
Technically, EUR/USD is still held below cluster resistance at 1.1378 and we're treating recent price actions from 1.0461 as consolidation in the larger down trend. However, Euro is displaying some bullishness elsewhere. EUR/GBP's break of 0.7384 resistance confirmed resumption of rebound from 0.7013. Considering that it was supported in long term support zone of 0.6535/7258. We'd likely seen further sustainable rise back to 100% projection of 0.7013 to 0.7384 from 0.7116 at 0.7487 and above. EUR/JPY's rise argues that fall from 149.76 has completed at 126.09 already and a test on 136.67 resistance should be seen. EUR/AUD's rebound also argue that fall from 1.5331 is completed at 1.3671 after hitting 50% retracement of 1.1602 to 1.5831. More importantly, this is the first sign that whole correction from 1.5831 has completed. Further rise would be seen to 1.4443 resistance to confirm the outlook. Even EUR/CHF's rebound argues that the pull back from 1.0807 has completed at 1.0233. We'll keep an eye on whether Euro's strength would continue this week.
Dollar's suffered some selloff after recent weak economic data, including Q1 GDP. The relatively neutral FOMC statement also provided little support to the greenback. However, the strong rebound on Friday raised some hope that recent pull back in the dollar is finished. Technically, dollar index is close to important cluster support at 94.05 and 38.2% retracement of 84.47 to 100.39 at 94.30. There is prospect of a strong rebound in the greenback. Main focus will turn to some near term levels this week, including 1.4971 in GBP/USD, 120.83 in USD/JPY, 1.2304 in USD/CAD and 0.7681 in AUD/USD. Also, attention will be on 1.0958 minor support in EUR/USD. Break of these levels will likely trigger more strengths in the greenback.
However, fundamentally, we're quite skeptical regarding dollar strength. A key event to watch is the non-farm payroll data to be released next Friday. Released last week, initial jobless dropped to the lowest level since 2000, which was positive. However, it should be noted that the employment component of ISM manufacturing dropped to 48.3, the contraction reading since May 2013, and the lowest level since September 2009. This piece of data raised much concern that the non-farm payroll report would be a disappointment and thus, would trigger a renewed selling in the greenback.
In addition to NFP, there will be a number of key events in the markets. To name a few more important ones. UK will have general election this week and PMI services and constructions. Sterling would likely stay pressured, a least ahead of election results. Australia will release trade balance, employment and RBA rate decision. Markets generally expected RBA to cut interest rate by 0.25%. And that, when realized, would prompt selling in the Aussie. Meanwhile, Canada PMI and job data as well as New Zealand job data will also be watched. Here are some highlights:
- Monday: Australia building approvals; Swiss SVME PMI; Eurozone PMI manufacturing final
- Tuesday: RBA rate decision, Australia trade balance; UK construction PMI; Eurozone PPI; US trade balance, ISM services
- Wednesday: New Zealand unemployment; Australia retail sales; UK services PMI; US ADP employment; Canada Ivey PMI
- Thursday: Australia employment; US jobless claims; UK election
- Friday: China trade balance; Swiss unemployment, CPI; German industrial production and trade balance; Canada job and employment; US NFP
Regarding trading strategies, we were partly correct in the strategy to buy GBP/USD for a short term trade last week but our entry point was too low to be filled. We'll cancel this short term strategy for now. For week ahead, we're seeing potential for Sterling and Aussie weakness. Euro is the natural choice to long against Sterling and Aussie. But we're cautious on a pull back in EUR/USD prior to NFP that might limit euro's strength elsewhere. Mean, we see chance of a disappointing NFP reading that could limit dollar's strength beyond next week. Hence, overall, we'd prefer to buy EUR/GBP and EUR/AUD on retreat to 0.7300 and 1.4170 respectively.