Euro Consolidates Versus Dollar, Breaks Over 140 Versus Yen

The euro was consolidating the previous day’s huge gains versus the US dollar, while making a fresh 5-month high versus the yen above the psychologically important 140 level. euro bulls were eyeing the May high of 1.1466 versus the dollar and any violation of the 1.15 level could potentially signal an important shift in sentiment towards the pair.

The latest round of euro strength was fuelled by higher Eurozone government bond yields, after ECB President Mario Draghi sounded more upbeat on inflation. Furthermore, the ECB chief did not appear particularly concerned about the recent sharp upward movements in bond yields, saying instead one should get used to higher volatility in a low rate environment. This caused the 10-Year bund yield to rise above 0.90% – its highest level since October of 2014 – well before the ECB’s government purchase QE plan was even announced in January 2015.

The latest developments on negotiations between Greece and its creditors were unclear, as some spoke of progress in the meeting between the Greek Prime Minister and the Head of the European Commission and that a solution was close, while others spoke of intractable differences between the two sides. The Greek Prime Minister said the country would make an IMF debt repayment this Friday, alleviating worries about an imminent default.

The Australian dollar surrendered some of its recent gains today, as retail sales for April were flat instead of rising 0.4% as expected by economists and the trade deficit was much larger than expected for the same month at 3.9 billion versus 2.1 expected and 1.2 the previous month. Both numbers carried an ominous message for Australian economic growth in the second quarter. The aussie gave up on the 78 US cents it was trading at yesterday, but managed to hold the 77 cent mark as it dipped to as low as 0.7707 before rebounding slightly to 0.7718.

Looking ahead, it is likely to be a relatively quiet day, which could give traders the opportunity to adjust their positions ahead of tomorrow’s all-important US employment report for May. The Bank of England will announce its decision during the European session, but no change is expected and the whole event is unlikely to cause much movement in the pound. Later during the US session, weekly jobless claims and first quarter productivity and unit labor costs will be watched.