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Euro Drops on Spain Election Outcome, Yen Down After Trade Data

Talking Points:

  • Euro Declines as Spanish Election Results Hint at Parallels with Greece
  • Yen Lower as Japan’s Trade Report Tops Forecasts, Boosts Risk Appetite
  • See Economic Data Directly on Your Charts with the DailyFX News App

The Euro underperformed in overnight trade, falling as much as 0.2 percent on average against its leading counterparts. The selloff followed the emergence of results from Spanish local and regional elections. Exit polls suggested the establishment PP and Socialist parties too just 53 percent of the vote compared with 65 percent in 2011.

The outcome underscored the growing influence of Podemos, an anti-austerity party in the mold of Greece’s now-ruling Syriza. Traders’ negative reaction probably reflected fears that today’s results foreshadow a similarly fragmented outcome in the general election expected in November, with Podemos potentially emerging as a kingmaker in coalition negotiations. That would raise the possibility of a Greece-like fiasco in the Eurozone’s fourth-largest economy.

The Japanese Yen likewise faced selling pressure after a better-than-expected Trade Balance report offered a boost to risk appetite, weighing on the safety-linked currency. A monthly deficit of -¥54.3 billion in April proved much smaller than the -¥351.1 billion shortfall predicted by economists ahead of the release. Exports rose 8 percent year-on-year, topping bets on a 6 percent increase.

Looking ahead, market holidays in the UK, Germany and the US are likely to make for thin liquidity conditions at the start of the trading week. While this may make for relative quiet, it may likewise contribute to outsized volatility in the event that a particularly jarring headline unexpectedly comes across the wires.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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EUR/USD Rally Checked by ECB Commentary, Better US Data

EUR/USD Rally Checked by ECB Commentary, Better US Data

Fundamental Forecast for Euro:Neutral

- EURUSD fell back to an important technical level of support by mid-week…

- …and eventually continued lower after the first blush dovish FOMC minutes.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

It was a very rough week for the Euro right from the get-go, as the 18-member currency wiped out all of its gains versus the US Dollar that had accumulated over the prior three-weeks. EURUSD plunged by -3.82% to $1.1008; EURJPY slipped by -1.98% to ¥133.76; and EURGBP fell by -2.28% to £0.7103. The main source of bullishness for the Euro – rising German yields – was abruptly removed from the equation by mid-week, when ECB Vice-President Benoît Coeuré said that the central bank would increase its pace of bond-buying in the short-run in order to balance out the lack of liquidity in markets (thereby making it more difficult for the ECB to achieve its monetary policy goals) in July and August.

In a sense, the ECB’s QE-driven trade – via the portfolio rebalancing channel effect – is dictating asset performances across the risk spectrum. In tandem, European sovereign yields are falling, the Euro is depreciating, and European equity markets are rallying. Investors are front-running the ECB by buying bonds and seeking riskier assets in the process; lower fixed income yields amid recently elevated inflation expectations dictates the need to seek out higher returns along the risk spectrum.

The ECB’s abrupt change of plans is coinciding with the beginning of a shift in US economic data momentum, which more or less has coalesced into the ideal environment for EURUSD declines. After weeks of disappointing economic data – unseasonably weak, even – the US economy has started to see patches of good data. Although the April FOMC minutes initially sparked some downside in the US Dollar, traders have quickly refocused to data released in the interim period since the last FOMC meeting: April US labor market data rebounding back towards its 12-month trend; and April US Housing Starts surging by over +20% to the highest level since November 2007.

The moment for EURUSD to stage a continued, meaningful rally may be behind us at present. While Greece is still a lingering backburner issue, its lack of impact on markets is a reflection of the lack of serious progress or erosion made with respect towards a long-term debt deal; traders have been lulled into a state of complacency and boredom. In turn, this means that Greece’s future potential as a catalyst is limited to explosive tail-risk scenarios only – markets simply don’t care for better or for worse.

If Greece does take a turn for the worse, which is possible with senior Greek government officials pledging to stick to their pre-election platform promises which run contrary to what Greece’s creditors want, there may be significant room for EURUSD to fall further. The market is no longer overcrowded in a short EURUSD position, with EUR speculative short positions having fallen for four straight weeks, and USD speculative long positions having risen for eight straight weeks. The short covering rally period has passed, and it will be easy for EURUSD to achieve further downside levels with so many traders now on the sidelines. –CV

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US Dollar Recovery Fighting Liquidity, Growth Headwinds

US Dollar Recovery Fighting Liquidity, Growth Headwinds

Fundamental Forecast for Dollar:Neutral

  • Remarks from Janet Yellen that she still expects a hike this year leveraged an uptick in core CPI and sent the USD higher
  • Key Dollar pairs (EURUSD, GBPUSD, USDJPY) start off at high profile levels with holiday liquidity and a view to GDP
  • See the 2Q forecast for the US Dollar and other key currencies in the DailyFX Trading Guides

There is little doubt in the market consensus that the Fed will be the first major central bank to hike rates, and that will maintain a long-term bid for the Dollar. Yet, in the interim, the particular timing of that launch can continue to cause wobbles for the Greenback. The past two months have been marked by consolidation and mild correction for the benchmark currency, while speculation over the fundamental and technical extent of the retreat has gathered volume. To end this past week, a well-timed combination of Fed Chairwoman Yellen commentary and an uptick in core inflation led to a strong rally to critical levels. Now sitting at the cusp of a revived bull trend and holiday-dampened liquidity conditions ahead, FX traders are looking ahead with a high level of anxiety.

Had we not experienced the Dollar’s strong push to close out the past week – moving it to a four-week high versus the Euro and four month high against the Yen – its standing would have already been impressive. The currency was already positioned for an impressive recovery with a three-day rally. Yet, with the combination of inflation data and carefully selected comments from the FOMC head, the FX market will spend the weekend on tenterhooks speculating whether a key breakout will be realized or rejected.

Under normal conditions, the biggest weekly rally in nearly two years (a 1.7 percent advance) would have proven strong support for the belief that the Dollar was returning to its bull trend. Yet, there are complications to this view. While the medium-to-long-term view for monetary policy, growth and haven appeal favor the Greenback; there are counterproductive pockets of speculation that can keep the ‘eventual’ view in the future and momentum sidelined.

Through market conditions, we have closed out an impressive week; but bulls have not yet crested the important hill. EURUSD has reached 1.1100, but not broken below. GBPUSD has returned to its critical 1.5500 border without marking the shift in control. USDJPY stands a 2015’s well-worn range highs – which also happen to be eight year highs. A decisive move to either break or reverse from these levels Monday is made difficult by the fact that there will be a drain on liquidity as the US, UK, Germany and Hong Kong will be offline for market holidays. A break would likely lead to disjointed volatility. A correction will be met with immediate skepticism.

Fundamentally, the charge for a recovery is hampered by the source of this most recent recovery. Yellen – like most of her colleagues – has attempted to be as clear as possible in her communication of monetary policy. They will not ‘pre-commit’ to decisions; but given current trends, it is likely that a hike is realized sometime this year. She carefully shaped this timeframe in her speech Friday. With Fed Fund futures still pricing a first hike out in January of next year, reinforcing a move sometime in 2015 can rouse the bulls. That said, it could be December rather than September. And, the CPI data that reinforced her bearing is similarly non-committal. Core inflation did tick up – and has slowly built support alongside wages these past months. However, it isn’t imminent.

In the week ahead, there are plenty of indicators and Fed speeches on the docket. Yet, few of them really hit the high-profile level that we would expect to single-handedly benchmark the timing for the first rate hike. One indicator in particular that should be kept on our radar is Friday’s 1Q GDP update. This is a revision, which most people would write off. However, given how fine the consideration for a data-dependent policy move is; a meaningful adjustment can trigger a sizeable response.

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A Fundamental Push for Key EURUSD, GBPUSD and USDJPY Levels?

A surge from the Dollar to close this past week has put many of the ‘majors’ on the verge a reviving a long-term trend.

US Dollar Forecast– US Dollar Recovery Fighting Liquidity, Growth Headwinds

There is little doubt in the market consensus that the Fed will be the first major central bank to hike rates, and that will maintain a long-term bid for the Dollar.

Japanese Yen Forecast – USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

The near-term breakout in USD/JPY raises the risk for a run at the 2015 high (122.01).

Australian Dollar Forecast – Australian Dollar Recovery May Resume After US-Linked Interlude

The Australian Dollar may resume its recovery after a brief interlude amid jitters preceding key US economic news-flow last week.

Gold Forecast – Gold Outlook Remains Supportive Above 1200- All Eyes on FOMC, GDP

Gold prices are softer going into the final full week of May, with the precious metal off by more than 1.5% to trade at 1203 ahead of the New York close on Friday.

A Fundamental Push for Key EURUSD, GBPUSD and USDJPY Levels?

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Gold Outlook Remains Supportive Above 1200- All Eyes on FOMC, GDP

Gold Outlook Remains Supportive Above 1200- All Eyes on FOMC, GDP

Fundamental Forecast for Gold:Neutral

Gold prices are softer going into the final full week of May, with the precious metal off by more than 1.5% to trade at 1203 ahead of the New York close on Friday. The decline comes amid a sharp rebound in the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker:USDOLLAR) rallying more than 1.6% to snap a 5-week losing streak. Despite this week’s lackluster performance, gold has continued to hold above technical support and the broader outlook remains constructive while above 1200.

Although the U.S. dollar showed a bullish reaction to the U.S. Consumer Price Index on Friday, the ongoing contraction in the headline reading and the lack of growth in the core rate of inflation may push the Fed to preserve the zero interest rate policy well into the second half of 2015. The committee has stated that conditions need to be in place for the central bank to meet the 2% inflation target before moving the benchmark interest rate amid the ongoing slack in the real economy.

Gold prices have largely reacted favorably to poor U.S. metrics as of late (and vice versa) as markets attempt to gauge the timing & pace of the Fed’s normalization cycle. As such, market dynamics may encourage positive U.S. data to dampen the appeal of the precious metal going into the U.S. event risks scheduled for the days ahead.

Fed speeches, Durable Goods Orders, Consumer Confidence & the second read on 1Q GDP will be in focus ahead into the end of May. Consensus estimates are calling for a downward revision to the initial forecast with expectations now projecting an annualized 0.9% contraction in the growth rate. The print would mark the first negative print since the 1Q of 2014, and a weaker-than-expected read could further kick out interest rate expectations as the FOMC Minutes revealed a June 17th interest rate hike is ‘unlikely.’

From a technical standpoint, gold is hovering just above key support into 1200 where the initial monthly opening range high converges on the lower median-line parallel extending off the yearly low. We will reserve this region as our bullish invalidation level with a break below targeting putting into focus support targets at 1187 & 1176. Resistance is eyed with the 200 day moving average at 1215 backed by 1225. A breach above this threshold keeps the long-bias in play targeting the upper median-line parallel / 1244/46. Note that a multi-month momentum support trigger remains in play off the March lows – break would be bearish.

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USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

Fundamental Forecast for Euro:Neutral

The near-term breakout in USD/JPY raises the risk for a run at the 2015 high (122.01), but the fundamental developments coming out of the world’s largest economy may undermine the bullish outlook surrounding the exchange rate should we see a growing number of Fed officials show a greater willingness to further delay the normalization cycle.

Speculation surrounding the Fed policy outlook may play an increased role in driving dollar-yen volatility as the Bank of Japan (BoJ) preserves a wait-and-see approach, and another series of dismal U.S. data prints may drag on interest expectations as the Federal Open Market Committee (FOMC) Minutes show a greater willingness to retain the zero-interest rate policy (ZIRP) beyond mid-2015. The preliminary 1Q U.S. Gross Domestic Product (GDP) report will be in focus going into the last full-week of May, and the updated print may dampen the appeal of the greenback as market participants anticipate a 0.9% contraction in the growth rate versus an initial forecast for a 0.2% expansion.

A marked downward revision in 1Q GDP may encourage the Fed to retain the ZIRP for an extended period of time, and we may see a growing number of central bank officials adopt a more dovish tone should the weakness from the beginning of the year carry into coming quarters. With FOMC voting-members Stanley Fischer, Jeffrey Lacker and John Williams scheduled to speak next week, the fresh batch of rhetoric may ultimately spur a near-term pullback in USD/JPY should the policymakers talk down bets for a September rate hike.

Nevertheless, the technical outlook highlights the risk for a test of the 2015 high as USD/JPY breaks out of the near-term range, and a more bullish formation may take shape in the days ahead should the U.S. developments highlight an improved outlook for the U.S. economy and beat market expectations.