1.30 in EUR/USD and 100 in USD/JPY are proving to be rock solid support and resistance levels. While the euro is currently trading below 1.30, the sell-off has been unconvincing and the pair has quickly magnetized back above this level on each occasion. USD/JPY on the other hand has yet to break 100 and the high for each attempt has been lower than the last. The resilience of the euro has been remarkable. Between the lower German IFO, PMI and ZEW surveys, the European Central Bank has every reason to cut interest rates and could do so early as next week. The ECB also reported this morning that loan demand declined in the first quarter because of economic uncertainty – which is another reason why they should ease. Yet the EUR/USD has been unfazed thanks to the rise in U.S. and European equities, expectations for Japanese purchases of European bonds and political progress in Italy. Italian President Napolitano has tasked Democratic Party Deputy Enrico Letta to form a new government and serve as Prime Minister. The next step is to see whether he will be confirmed by the divided Parliament.
We think it is only a matter of time before 1.30 finally breaks and the EUR/USD sees 1.29 and it could happen before the ECB meeting. Of the 35 economists surveyed by Bloomberg, 22 expect a 25bp rate cut at the next meeting. This is only a small majority but given how much Eurozone data has deteriorated, the best case scenario for next week’s ECB meeting is dovish comments from the central bank which in of itself is bad for the euro. If the ECB doesn’t ease in May, they will set expectations for a rate cut in June. While there are no major Eurozone economic reports between now and the ECB meeting next Thursday, the euro could start selling off at the beginning of next week (if not sooner) on the mere expectation for more stimulus. In other words, we don’t think EUR/USD will be able to hold 1.30 for much longer. A number of ECB policymakers will be speaking today and tomorrow so keep an eye out for more rate cut talk.
Meanwhile USD/JPY is itching for a breakout but weaker economic data continues to prevent the currency from doing so. U.S. durable goods orders plunged 5.7% in the month of March after rising a downwardly revised 4.3% in February. Excluding transportation orders, durable goods fell for the second month in a row by 1.4%. While this data confirms that March was a difficult month in the U.S. economy, a break of 100 this week won’t be triggered by U.S. data. The main catalyst will be the Bank of Japan’s monetary policy meeting and their semi-annual report on the economy. If USD/JPY doesn’t break 100 after tomorrow night’s event risks, then it should continue to hold below this key level until next week’s FOMC rate decision and non-farm payrolls report.