The euro has remained under pressure following Mario Draghi’s dovish announcements and that has seen the currency fall in four of the last five trading sessions.
EUR/USD is likely to remain weak as we move towards the next ECB policy meeting on June 5th, though we could see support coming in around the 1.36 handle. While the market has now all but priced in any event of monetary easing, traders will still not want to hold the currency before the next meeting.
However, with UK and US markets closed on Monday, real market momentum will likely come from a number of weekend European elections and there are three big ones to trouble investors.
The European Parliament Election will be widely watched as it could impact just who stays and who goes in the European Commission.
If euro-skeptic parties such as the United Kingdom’s UKIP party win too many votes it could signal uncertainty and that could put added pressure on the euro. Traders will also have the small matter of Greek local elections and the Ukraine Presidential election to deal with and both events could easily upset markets when traders return on Tuesday.
While Greek elections are widely expected to run smoothly, traders should never rule out the possibility of renewed social unrest. Meanwhile in Ukraine, violence is still bubbling over and President Putin is not making matters any better by falling short of recognising the country as an independent sovereign state.
On the data front, economic reports are limited in Europe, while US traders will be watching US durable orders on Tuesday, GDP on Thursday and University of Michigan confidence numbers on Friday.
Last week, the US dollar extended gains against most of its major peers as Fed officials downplayed the timeline for a rate hike and US home sales came out better than expected. There is now consensus among traders that there will be a decent waiting period between the last Fed taper and the first Fed rate hike, as Fed policy makers will want to make sure there is no immediate rise in treasury yields.
GBP/USD Outlook
Over the past 12 months we have seen GBP/USD move from lows of 1.49 to highs of 1.70 as the UK economy has continued to improve and the Bank of England has suggested it could raise rates sooner than expected. This rise has been strong and steady but the currency could well pause here with little data expected on the calendar this week.
Moreover, open position data suggests that there are an overwhelming number of bulls in GBPUSD at present and plenty of shorts holding just above the 1.70 barrier.
Traders seem to think the BOE will be the next major central bank to raise rates but this is still some way off, and any move upwards in GBP/USD will most likely have to come after a decent short-term pullback in the pair.
USD/JPY
While the BOE have given clear views as to where they see inflation heading, there has been a lot more inconsistency out of the Bank of Japan and this has translated into a currency pair that is not sure where it is going next.
The BOJ was odds-on to provide extra stimulus just a couple of months ago but a string of positive economic releases out of Japan has seen those odds lengthen. Currently, markets are pricing in less than a 50% chance that additional easing will take place in July and considering recent data even those odds could be too high. Policy makers could easily wait it out until the third quarter and that should see USD/JPY come under more downward pressure over the next few weeks.