European majors were the generally strongest currencies last week. Euro was the strongest one as boosted by surging bond yields. In particular, some traders noted that yield gap between German Bunds and US treasuries dropped to as low as 150 basis points, down from around 180 bps around a month ago. We've mentioned during the week that it's perceived by some economists that the rise in European yields was a reflection of improvement in economic and inflation outlook in the Eurozone. Such change in sentiments sent EUR/USD through 1.14 an EUR/JPY through 136. Meanwhile, EUR/GBP recovered ahead of 0.7116 near term support. The development also sent dollar index through key near term support around 94.
Meanwhile, Sterling was the second strongest currency last week, following Euro as the post election rally extended. Nonetheless, the overbought pound lost momentum after BoE inflation report. The quarterly inflation report showed that the BOE has been less optimistic over UK's growth outlook. The members revised lower GDP growth to 2.5% this year, from 2.9% projected previously. They also trimmed the forecast to 2.6% (previous: 2.9%) and 2.4% (previous: 2.7%) for 2016 and 2017 respectively. The BOE left the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound in May. The inflation report suggested that policymakers now expected the first rate hike to take place in 2Q16, compared with consensus of 1Q16. More in BOE Downgraded Growth Outlook in Latest Inflation Report.
New Zealand dollar stayed the weakest major currency again on rate expectations. In the Financial Stability Report released Wednesday, RBNZ indicated that the financial system has continued to face 3 key areas of risk: the rise in Auckland house prices, the dairy sector, which is experiencing a sharp fall in incomes in the current season, and the extremely loose global financial conditions. Regarding the first risk, the RBNZ has proposed new loan-to-value ratio (LVR) restrictions, subject to consultation and will be implemented in October 2015. We believe that the new measures would allow the RBNZ to deliver a rate cut in June taking the OCR lower by -25 bps to 3.25%. More in RBNZ Paves Way for Rate Cut.
Dollar came close as the second weakest major currency. A string of weak economic data, except jobless claims, triggered traders to push back their rate expectations. June rate hike from Fed is basically ruled out. The weak Q2 data, including retail sales and PPI raised doubt on even a September hike. Comments from Fed officials also sounded non-committal even though a hike within this year is still expected. Dollar index dropped to as low as 93.13 last week. the firm break of 94.05 near term support argues that fall from 100.39 is correcting the whole rise from 78.90. Deeper decline should be seen to 38.2% retracement of 78.90 to 100.39 at 92.18. We'd probably only see some support around 55 weeks EMA at 89.93, which is close to 50% retracement. And, near term outlook will stay bearish as long as 95.94 resistance holds.
In other markets, US stocks were attempting for a breakout from recent rally to resume the up trend. S&P 500 closed at new record high at 2122.73. DJIA closed to 18272.56, just shy of record close at 18288.63. Upside momentum isn't too convincing yet. But we'd favor and up trend resumption soon to long term target of 161.8% projection of 666.79 to 1370.58 from 1074.77 at 2116.60. Gold extended recent rebound and is possibly finally taking out 1200 resistance firmly. Crude oil, on the other hand, continued to struggle around 60 handle.
Regarding trading strategies, firstly, our anticipated rebound in dollar didn't happen and the sell EUR/USD and buy USD/JPY on break wasn't filled. We held on to our EUR/AUD long with stop at 1.39. There was some risk in the EUR/AUD position but eventually the pull back was contained at 1.3909 and thus we're holding on to it. For this week, the rebound in EUR/AUD suggests that rise from 1.3671 could finally be resuming and we'll hold on to the long position and keep the stop at 1.3909. Another strategy to consider is buying EUR/JPY as the rally could be supported by risk appetite as well as surging European yields. We'll buy EUR/JPY at market at the week starts with stop at 135.