Euro and pound rally against the greenback

It was a busy session on the economic front with some key releases from Europe and the US setting the tone. 

Yesterday I highlighted the risks the euro was facing and I was eyeing a close below 1.38 for shorts. Once again, this level held despite a slightly disappointing CPI print. The region’s CPI came in at 0.7%, slightly weaker than the expected 0.8%. However, core inflation was up 1% from 0.7% year-on-year, in-line with expectations. While this figure didn’t blow expectations out of the water, it seems the market was positioned for a disappointing reading. Additionally the bank lending report showed some positive signs, with lenders anticipating further improvement over the next three months.

These two reports saw expectations for imminent ECB action fade, and shorts in the single currency unwound. EUR/USD reversed from a low of 1.3773 to now be trading around 1.387. This is where the highs have been capped over the past week and we may see a fairly tight range around here with most of the region closed today for the May Day holiday.

Cable trades at a five-year high

Meanwhile, the pound rallied to its highest level since August 2009 against the greenback, printing a high of 1.69. The high from August 2009 was 1.704 and the 1.70 region is likely to be resistance in the near term. While there was no data out of the UK to move the sterling, a benign GDP print out of the US seems to have triggered USD weakness which lifted the pair. The FOMC meeting was a bit of a non-event with the Fed tapering by an additional $10 billion - evenly split between treasuries and mortgage-backed securities. Even the statement was mostly unchanged and continued to acknowledge a pick-up in economic activity, particularly after slowing in wintery months.

The other major reading this week was the Q1 GDP reading and it came in much lower than the already benign estimate. While it is a bank holiday in the UK later today, we will still have some data releases with manufacturing PMI and nationwide HPI being the main ones to look out for. Any positive readings will underpin the bulls and could see 1.70 tested in the near term. In the US, unemployment claims and  Janet Yellen’s speech at the Independent Community of Bankers summit will be the key events.

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