EUR: A Dovish ECB Next Week Likley To Limit Any Rebound In EUR/USD Until Then – Citi
Citi discusses the EUR outlook around next week’s EXCB June policy meeting.
“Markets also now eye the ECB June 6th meeting where a decision about (1) TLTRO lending rate likely to be less generous as per recent ECB speak, and (2) a possible extension to the calendar-based part of forward guidance on interest rates though with euro short rates now pricing the first ECB hike in Q4â2021, an extension of ECB forward guidance is unlikely to have much impact,” Citi notes.
However, with euro zone (especially German) manufacturing data weak and leading to the continuing decline in market based longer term inflation expectations to 2016 lows (reflected in German Bund yields now at -16bp and only 4.4bp away from the 2016 record lows), it is difficult to see how the ECB can be anything but dovish at its June 6th meeting â likely to limit any rebound in EURUSD until then,” Citi adds.
24-HOUR VIEW: Decline in EUR has scope to extend further but oversold condition suggests a break of 1.1100 is unlikely. We highlighted yesterday the soft underlying tone could âlead to a lower EUR but 1.1130 is unlikely to be challengedâ. The subsequent weakness exceeded our expectation as EUR touched 1.1122 before ending the day on a soft note (closed at 1.1130). While the decline yesterday appears to have scope to extend further, it is approaching oversold territory and a break of the major 1.1100 support would come as a surprise. On the upside, only a move above 1.1175 would indicate that a short-term bottom is in place (minor resistance is at 1.1155).
1-3 WEEKS VIEW: EUR is expected to trade with downside bias and test 1.1100/05. While EUR dipped below our expected 1.1130/1.1230 sideway trading range (low of 1.1122), the decline lacks momentum and EUR does not appear to be ready to move into a ânegative phaseâ. The underlying tone has weakened but EUR has to register a daily closing below the major 1.1100/05 support level in order to indicate that a move to 1.1050 has started. The prospect for such a move is not high for now but would continue to increase unless EUR can move back above 1.1205. Meanwhile, EUR is expected to trade with a downside and test 1.1100/05.
GBP/USD – Closed Below Key Support Opens The Door To 1.2409
- Flat after closing -0.2% amid broad based, risk led, USD strength
- Brexit uncertainty continues to smash the car industry nL8N2357C4
- Scotland edges towards a second Brexit fuelled secession vote, nL8N23550X
- Charts – momentum studies slip, 5, 10 & 21 DMAs fall – bearish setup
- Close below 1.2638, 76.4% 2019 rise opens the door to 1.2409 2019 low
- 1.2605 trend low and NY 1.2672 high initial support/resistance
- 1.2600 485M and 1.2650 256M are the close strikes
24-HOUR VIEW: Downward momentum is still patchy but there is room for GBP to test 1.2600 first before a rebound can be expected. While we expected GBP to weaken yesterday, we were of the view âthe next support at 1.2600 is not expected to come into the pictureâ. The subsequent price action was in line with our view as GBP briefly touched 1.2612 before staging a mild recovery. Downward momentum remains patchy at best but from here, there is room for GBP to test the solid 1.2600 level before a more sustained rebound can be expected. Resistance is at 1.2655 but only a move above 1.2685 would indicate that the current soft patch in GBP has stabilized.
1-3 WEEKS VIEW: GBP is expected to trade with a downside bias. When we indicated on Monday (27 May, spot at 1.2725) that a âshort-term bottom is placeâ, we expected GBP to trade sideways for âa couple of weeksâ. While GBP subsequently traded sideways, the underlying tone has weakened as it eased off quickly after touching 1.2754. That said, only a daily closing below 1.2600 would indicate the start of a fresh ânegative phaseâ towards 1.2530. The prospect for such a scenario is not high for now but is likely to increase unless GBP can move above 1.2720 within these few days. Meanwhile, GBP is expected to trade with a downside bias and 1.2600 acting as an âattractionâ.
AUD/USD – No Reaction To Weaker Headline Data
- AUD/USD steady around 0.6925 despite weaker than expected data
- Q1 Capex -1.7% vs +0.5% expected and Building Approvals -4.7% vs flat exp
- Capex 2nd estimate 2019/2020 spending a healthy 99.1 BLN
- Data having little impact as market already pricing in RBA rate cuts
24-HOUR VIEW: AUD is expected to trade sideways, likely within a 0.6900/0.6940 range. AUD traded in a subdued manner between 0.6904 and 0.6931 yesterday, narrower than our expected range of 0.6910/0.6940. While the current movement is still viewed as part of sideway-trading phase, the weakened underlying tone suggests the immediate bias is for AUD to test the bottom of the expected 0.6900/0.6940 range.
1-3 WEEKS VIEW Short-term bottom in place, AUD is expected to trade sideways. No change in view from yesterday, see reproduced update below. AUD traded in a tight 19 pips range between 0.6917 and 0.6936 yesterday (28 May) before ending little changed at 0.6922 (+0.07%). The quiet price action reinforces our current view wherein last weekâs 0.6865 is a âshort-term bottomâ and AUD is in âsideway-trading phaseâ. For now, the 0.6860/0.6985 range indicated on Monday (27 May) is expected to be enough to contain the movement in AUD for a couple of weeks. Looking ahead, the âsideway-trading phaseâ is more likely to be resolved with the start of fresh ânegative phaseâ but this is only upon a clear break of 0.6860.
24-HOUR VIEW: NZD could dip below 0.6500 but last weekâs low of 0.6482 is unlikely to come under threat. The relatively sharp decline in NZD that touched an overnight low of 0.6504 came as a surprise (we expected NZD to trade sideways yesterday). Downward momentum has improved and NZD could dip below the 0.6500 support. That said, last weekâs low of 0.6482 is unlikely to come under threat. Resistance is at 0.6530 and yesterdayâs peak near 0.6550 is acting as a very strong resistance level now.
1-3 WEEKS VIEW: Short-term bottom is in place; NZD is expected to trade sideways. After trading in a subdued manner for a couple of days, NZD staged a relatively sharp drop that came close to the bottom our expected 0.6500/0.6610 range (low of 0.6504). While the underlying tone has clearly weakened, it is too soon to expect the start of a fresh ânegative phaseâ. Only a daily closing below 0.6470 would indicate that NZD is ready to move to 0.6425. Meanwhile, the current price action is still deemed as a âsideway-trading phaseâ but after yesterdayâs price action, we have lowered the expected range to 0.6480/0.6570 (from 0.6500/0.6610).
24-HOUR VIEW: Advance in USD could extend further but the strong 110.00 resistance is unlikely to crack. We highlighted yesterday âdownward momentum has ticked up but a break of 109.00 is not expectedâ. The 109.00 level held as expected but the subsequent robust rebound from 109.13 came as surprise (overnight high of 109.69). While upward momentum has improved, it is too soon to expect a sustained rally. From here, the advance could extend further even though a crack of the strong 110.00 resistance is unlikely. Support is at 109.25 followed by the still rather strong level of 109.00.
1-3 WEEKS VIEW: USD has moved into a sideway-trading phase. USD dipped to 109.13 yesterday before staging a solid rebound. The price action reinforces our view that USD is in a âsideway-trading phaseâ within an expected 109.00/110.30 range. However, the underlying tone still appears to be on the soft side but USD has to register a close below 109.00 in NY in order to indicate the start of a ânegative phaseâ. Meanwhile, USD could continue to trade between 109.00 and 110.30.