After president Draghi’s speech at the ECB forum yesterday, many questioned the aggressiveness of the rally in the EUR at the time, but first thing in London, this did not stop the market from extending levels towards 1.1400.
Through the day, repeated dips into the lower 1.1300’s were paid up, but on the last attempt, headlines hit the wires stating the ECB considered the market reaction to his comments to have been misjudged. This saw the lead rate fall from circa 1.1375 to just under 1.1300 before buyers stepped in again. As we noted earlier, there was nothing new in his speech yesterday other than that of reflationary pressures feeding through, providing a mere catalyst of what many expected to materialise at some point.
President Draghi was again speaking today alongside fellow central bank heads at the BoE, BoC and the BoJ. This time around it was Governor Carney who rang the hawkish bell, stating that rate hikes will be discussed in the months ahead – traders saw this as a turn in his otherwise dovish stance.
Cable was already testing offers from 1.2850 at the time, and the algos tore into these levels taking the market back up through 1.2900 and into the key resistance zone we have been highlighting in the past few weeks. This same alongside the drop back in EUR/GBP, which has been the more volatile pair on the day. We tested and held the pre 0.8900 area, but despite the volatility initiated on rate policy talk by central bankers this week, the cross rate looks set to hold downside levels, with stronger bids seen into 0.8710-20 initially, if not 0.8670-60.
Both the USD and the JPY have been under pressure, but yield differentials hardly need pointing to, and with the 10-Year UST now above 2.20%, USD/JPY is back above 112.00. The move looks unconvincing as the greenback is getting slammed elsewhere, with Bund and Gilts narrowing spreads. This means strong gains for EUR/JPY and GBP/JPY hitting near 128.00 and 145.50 levels respectively.
Looking to the US data ahead, pending home sales added further reasons to switch out of USDs, falling 0.8% in May vs expectations of a 0.8% rise. Tomorrow we get the core PCE print, and this is also seen falling slightly, but should be largely priced in. The final reading of Q1 GDP is also due out of the US, so going into the end of the month, it is looking to be an extremely lively affair.
Over to the commodity currencies, and the CAD is trying to push higher against the USD, but there is strong resistance ahead of 1.3000. This may be academic unless the US perspective can improve, but the USD index has collapsed this week. That said, we are coming into a key congestion zone, and we look to circa 95.50-40 as an area to watch for from here. From the CAD side, the recovery in oil has certainly helped, but it is the change in tack from the BoC which is running the move higher, with the soft inflation numbers having done little to impede moves, though comparative levels have to be taken into account.
The DoE reported a smaller build than the APIs last night, but production levels fell a little over 1.0% to give an overall positive tone to oil price. WTI still grappling with offers ahead of USD45.0.
AUD and NZD have been somewhat excluded from these latest moves, but the former spot rate has reclaimed the 0.7600 handle and looks intent on retesting 0.7625-40. Stronger commodity prices have been supportive, but we also sense pressure on AUD/NZD has also playing its part, with sellers in the cross rate coming in again ahead of 1.0500. There is nothing to suggest the positive outlook on NZ has changed, but overbought levels and a central bank committed to keeping current policy in place suggests upside levels could be faded, which will reinforce the 0.7330-50 area in NZD/USD and sub 1.0400 in AUD/NZD.