17-Jun-2020

1) EUR/USD: The Good, The Bad, And The Ugly, Why Bears May Win This Battle
2) Dollar in Consolidation Modus
3) Yen In Holding Pattern As Japan’s Exports Slide To Record Lows

1) EUR/USD: The Good, The Bad, And The Ugly, Why Bears May Win This Battle

Lower highs and higher lows – the narrowing wedge in euro/dollar triggers the question: where next? The world’s most popular currency pair is pushed and pulled by several factors.

US Retail Sales smashed all expectations with a surge of 17.7% in May – more than double the estimates and painting a V-shape when only observing consumption data for April and May. America goes on a shopping spree that encourages the whole world and weighs on the safe-haven dollar.

Coronavirus infections and cases continue falling in Europe, and preparations to resume additional events are on the rise. Flights from Germany to Spain’s Balearic islands are back, just ahead of the summer.

Dexamethasone – a cheap and commonly available steroid has proved effective in reducing coronavirus deaths in a wide, randomized controlled trial conducted by the University of Oxford. A drop of up to a third in mortalities among severely sick patients is encouraging for the whole world.

COVID-19 deaths are dropping in the US, with the greater New York Area leading the way. But that is where America’s health optimism ends.

Hospitalizations and infections are rising at an accelerating pace in the US Sun Belt. Apart from large Florida and Texas, hot Arizona is also struggling. Ron DeSantis, Florida’s Governor and a fan of the president, rejected calls to reimpose restrictions.

Moreover, cases have increased in Oklahoma, where President Donald Trump is set to hold a 20,000-strong indoor rally on Saturday. Local authorities have pleaded him to cancel or change the nature of the event.

Robert Kaplan, the President of the Dallas branch of the Federal Reserve, stressed that the next steps of the economic recovery depend on successfully executing a health strategy, rather than more fiscal and monetary stimulus.

His boss, Fed Chairman Jerome Powell, also said that a full recovery depends on curbing the disease and refused to get carried away by optimism coming from consumption data. Powell continues testifying today and will likely repeat the same messages – potentially dampening the mood and keeping the safe-haven dollar bid.

The dollar may find more demand as geopolitical tensions remain elevated. China – which is dealing with a severe outbreak in Beijing, causing it to restrict transport – is clashing with India. A brawl between soldiers at the remote Himalayan Galwan valley has taken the lives of dozens.

Will the nuclear-armed countries de-escalate tensions? Efforts are underway, but a breakthrough is still not on the cards.

Tensions on the Korean peninsula seem far from calming down. A day after North Korea blew up the liaison office in Kaesong, it is reportedly sending troops to the Demilitarized Zone (DMZ) separating the two Koreas.

Seoul said it would respond with force to any additional military action. Pyongyang expressed anger that activists distributed anti-North Korea propaganda without intervention from the South. Also here, the possession of nuclear arms by the North and by the US-South Korea’s ally, means the world is watching.

Overall, there are more reasons to worry than cheer, potentially weighing on EUR/USD.

Momentum on the four-hour chart is now balanced. While the currency pair failed to conquer the 50 Simple Moving Average, it trades above the 100 and 200 SMAs. Setting higher lows and lower highs suggest a significant move is brewing, yet the charts do not suggest a clear direction.

Resistance awaits at 1.1350, the weekly high, followed by 1.1425, the three-month peak recorded a week ago. Further up, 1.1495 is the next level to watch.

Support awaits at 1.1270, a support line from mid-June, with more significant support awaiting at 1.1210, Friday’s low. Next, 1.1150 and 1.1080 await the currency pair.

2) Dollar in Consolidation Modus

The (trade-weighted) dollar reversed Monday’s setback even as global sentiment remained constructive. EUR/USD started in the mid-1.13 area, but failed to extend gains, even as German ZEW investor sentiment printed stronger than expected. Later, US May retail sales printed much stronger than expected. Equities gained further, but this time FX traders were more inspired by the better US data and higher US yields rather than risk sentiment. EUR/USD dropped below the 1.13 handle to close at 1.1264. Gains in USD/JPY were modest given the positive risk sentiment and the rise in US yields. The pair couldn’t hold on to post-retail sales gains and closed little changed at 107.32.

This morning, sentiment on Asian markets is less buoyant compared to the Europe/WS yesterday. Uncertainty on a corona outbreak in Beijing, geopolitical tensions on the Korean peninsula and between China and India cause investor caution. Japanese exports (-28.3%) and imports (-26.2% Y/Y) dropped more than expected, with especially exports to the US hit hard. The yen strengthens, but USD/JPY is holding north of 107, for now. EUR/USD shows no clear trend holding in the 1.1260/80 area.

Today, European data are mostly second tier and outdated. US housing data are also no market mover. The US Treasury will sell 20-y bonds. Yesterday, the dollar profited from higher US yields, but we don’t expect that to be the case again if it isn’t related to strong US data. Markets will also follow the debate on the EU rescue fund ahead of this week’s EU summit. However, no agreement is expected yet. So risk sentiment will probably remain the main driver for USD (EUR/USD) trading.

Last week, the three week-long EUR/USD rally fell prey to profit taking, but for now the correction remained modest. First important support comes in near 1.1160. We expect that area to hold. We expect more consolidative price action in the 1.12/1.1425 range

Yesterday, sterling stated a strong footing supported by a risk-on sentiment and positive headlines on the EU-UK brexit talks after Monday’s call between PM Johnson and EU leaders. However, gains evaporated soon (EUR/GBP close at 8959). A slow UK recovery and markets pondering potential future steps of the BoE (including negative interest rates or yield curve control) cap a sustained sterling rebound. For now, the bottom of the 0.8860/0.9055 range looks rather well protected. EUR/GBP is again near the 0.90 handle.

3) Yen In Holding Pattern As Japan’s Exports Slide To Record Lows

The Japanese yen was little changed today after the statistics office released the May trade numbers. The data showed that the country’s exports and imports declined at a record pace. Exports fell by 28.3% while imports fell by 26.2%. This is after the two declined by 21.9% and 7.1% respectively in April. As a result, the country had a trade deficit of more than 833.4 billion yen, which was higher than the expected 560 billion yen. These numbers came a day after the Bank of Japan delivered its interest rate decision. It left interest rates unchanged, continued with its yield curve control and quantitative easing programs.

The British pound declined against the US dollar in overnight trading. That was partly because of a stronger dollar and the fact that the Bank of England will start its monetary policy meeting today and release the decision tomorrow. Analysts expect the bank to leave rates unchanged and possibly announce more measures to stimulate the economy. These measures could include adding £200 billion to its quantitative easing program and even launching a yield curve control program. In the morning session today, we will receive the country’s inflation data for May.

The euro declined sharply in the American session partly because of the strong US retail sales data. The numbers showed that sales rose by more than 17% while the core retail sales rose by 12.4%. Later today, the euro will react to the eurozone’s consumer price index data. Analysts polled by Blomberg expect that the headline CPI declined by 0.1% in May after rising by 0.3% in the previous month. They also expect the core CPI to remain unchanged at 0.8%.

Other key economic data released today are crude oil inventories from the United States, Canadian inflation numbers, and US building permits and housing starts.

The USD/JPY pair remained in a holding pattern even after Japan released weak trade numbers. The pair is now trading at 107.20, which is below this month’s high of 109.83. On the four-hour chart, the price is below the 61.8% Fibonacci retracement level. It is also slightly below the 50-day and 100-day exponential moving averages. The price is forming a bearish flag pattern, which sends a signal that it may continue falling.