EUR/USD eyes further movement

The big talking points from FX traders today have been Friday’s strong US jobs report and Chinese trade balance (released on Sunday).

Source: Bloomberg

The Chinese trade data has been overlooked to a degree, as the figures were distorted by Chinese New Year, while the massive 48% jump in exports were helped by a low base from which to compare in 2014. If we combine the January and February numbers to try and smooth out the distortions, imports still fell a sizeable 20.2%. The more important numbers will be released this week and include CPI, industrial production, fixed asset investment, retail sales. We also get the financing numbers with new yuan loans in focus.

The US jobs report were strong as a headline number, although average hourly earnings were soft again and have been the main focal point from the doves. The nine basis point (bp) increase in US two year bond yields to 72bp tells a bigger story and highlights that the market took the fall in the unemployment rate to 5.5% as a sign that the Federal Reserve will act in June. The fed funds future is now pricing in an 80% chance of two of hikes from the Fed by year end.

Naturally, in this environment the USD has flown, with the US dollar index having its best one day gain since 2011 on Friday. The idea of central bank policy divergence is well established, but very rarely (if ever) have we seen a time when the Fed is lifting the funds rate while all other developed market central banks are easing. Since 1965, all other central banks have been hiking at the same time.

Looking at the markets, EUR/USD breezed through $1.10 and is eyeing a move to $1.08. The oscillators are suggesting the pair is oversold, but any short covering rallies will be sold into, so the question is more around compelling entry points. Parity for EUR/USD is largely being talked about, although only one FX forecasters surveyed by Bloomberg expects to see this level by year-end.

AUD/USD looks weak and my short idea from 2 March is 85 pips in the money at this stage. Looking at the daily chart there is a pronounced bear flag pattern, which would complete on a break of $0.7690. I would suggest adding to short positions on a break with a target of $0.7450.

There are sizeable vulnerabilities to the Australian economy, however, if the local unit is falling as a result of increased expectations around Fed action then it diminishes the need for near-term action from the Reserve Bank of Australia. Still, the trend in AUD/USD is lower and the path of least resistance is lower.

Click to enlarge

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.