EURO Aims for 1.12, USD Loses Serious Momentum

The biggest story today in the forex market today was the strong rally in the euro. The single currency broke above 1.10 and came within a few pips of 1.11. Stronger than expected Eurozone data contributed to the move but the 1.10 break occurred well before the first releases. Euro is still coasting on Emmanuel Macron’s victory and the strong possibility that Angela Merkel will be reelected as Chancellor in the fall. Despite the ECB’s dovishness, data has been good – German investor confidence rose strongly in the month of May, the Eurozone’s trade surplus hit a 3 month high and there were no revisions to the Eurozone’s Q1 GDP and French CPI reports. The euro also received help from the German – U.S. yield spread, which moved sharply higher in the past week. As our colleague Boris Schlossberg pointed out, political risk drove EUR/USD lower in the month of April and now that this risk has been removed, we could see stronger gains in the currency especially since the CFTC data last week showed speculators turning bullish for the first time since 2014. This means there’s room to the upside and on a technical basis we see no major resistance for EUR/USD until 1.12.

The U.S. dollar is losing serious momentum and all it took was a little patience to see USD/JPY join the selling. An unexpected decline in housing starts and building permits in the month of April triggered the initial wave of selling which gained momentum after options expired at 10am NY Time. Although not all of this morning’s U.S. economic reports were weak because industrial production increased, at some point the general trend of downside surprises would be too much for the dollar and today was the day that the bulls decided to liquidate. USD/JPY dropped below 113 as 10 year yields declined but the fact that USD/JPY did NOT close below 113 in a meaningful way is significant and suggests that for now, the uptrend remains intact. The bulls still don’t want to give up control but as more data disappoints, their conviction will weaken. We need to see USD/JPY move well below the 100-day SMA at 112.90 to open the way for further selling down to 111.95. There are no major U.S. economic reports scheduled for release tomorrow so USD/JPY traders will need to take their cue from yields but the current momentum suggests that the path of least resistance is lower.

Sterling also traded higher against the greenback but it took a lot of convincing to bring the buyers in because this morning’s inflation numbers failed to do the trick. Consumer prices rose 0.5% in the month of April, which was slightly firmer than economists had anticipated. This drove the year over year rate to 2.7% from 2.3%, the highest level since September 2013. Core prices also rose 2.4%, up from 1.8% the previous month. GBP/USD popped to 1.2958 on the back of the report but quickly sank back below 1.29 as investors recall the central bank’s comment that the increase in inflation won’t last because it is caused entirely by the weakness of sterling. However as the dollar sold off, sterling was driven higher and by the end of the North American trading session, GBP/USD closed well above 1.29. U.K. labor data is scheduled for release tomorrow and this is another report that could spur demand for the currency. Unlike inflation, which the market can discount, employment is sticky. According to the PMIs, manufacturing, service and construction sectors saw very strong job growth in April. Average weekly earnings are also expected to rise significantly but excluding bonuses wage growth is expected to slow. In many ways, earnings will be more important than the absolute amount of job growth. If the data is good like we anticipate, we could see another move towards 1.30 but if it is soft it will sink back down to 1.2850.

The Canadian and Australian dollars extended their gains against the greenback while the New Zealand dollar consolidated near its recent lows. All eyes are on USD/CAD which is forming a top. There’s no specific catalyst outside of U.S. dollar weakness and a mild recovery in oil. Crude prices actually fell today, confirming the rejection of $50. Canadian yields ticked lower and yet, the oversold loonie was bought by speculators looking to unwind their long USD/CAD positions as the currency pair broke through important support levels. A move to 1.35 now appears likely though it would be driven more by positioning than fundamentals. The minutes from the last Reserve Bank of Australia meeting had very little impact on AUD. The RBA is cautious but the Australian dollar was driven higher by a weaker U.S. dollar. The New Zealand dollar lagged behind despite another rise in dairy prices. Producer prices are scheduled for release this evening and an increase is expected after the sharp rise in CPI.