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EURUSD is currently trading around 1.2022 in US session on Wednesday; surged by almost 0.24% and bounced back from the earlier slump on a dovish hold by Fed, contrary to earlier market expectations of a hawkish hold. Earlier EURUSD stumbled by almost 0.30% to a low of 1.1953 and extended its slump further ahead of a high probable hawkish hold by Fed.
In the early EU session on Wednesday, EURUSD got a slight boost and surged to the session high of 1.2033 on some improved EZ economic data. The Eurozone April Markit manufacturing PMI came higher to 56.2 from 56.0 in March and better than the estimate of 56.0. Although Manufacturing PMI for April from Germany, Spain, France was upbeat/in line with market expectations, while Italian number was subdued.
EZ economic data was mixed:
The Eurozone Q1 GDP rose +0.4% (Q/Q), right on expectations, but slumped from prior figure of +0.6%. Similarly, on Y/Y basis, the EZ GDP flashed as +2.5%, right on expectations, but slumped from previous quarter’s growth of +2.7%. The Eurozone March unemployment rate was unchanged at 8.5%, right on expectations. But Italian unemployment rate is continued to be subdued and running well into the double-digit at 11.0%.
Overall, compared to the US, the economic data from EZ is quite lackluster; while Fed may be concerned about rising US inflation/stagflation, ECB may be now concerned about deflation. The slump in Q1 GDP may further induce ECB to stay on the dovish/neutral line and may also further ease pressure on it to dial back monetary stimulus or change in policy guidance language in the June meeting.
Thus, EUR was not impressed on Wednesday, when even ECB’s Weidmann sounds hawkish and said that the market expectation for first ECB hike around mid-2019 is not unreasonable and ECB could do QE tapering at more pace compared to Fed.
Weidmann further commented that “Publishing detailed interest rate path would go too far, may create confusion. ECB has not corrected or committed to market expectation for the first hike before the end of bond reinvestments. Current guidance on the timing of first rate hike is rather vague. The first hike could come more-closely have the end of QE than in the US. Worries about approaching the end of an economic upswing are exaggerated. Monetary policy normalization will take some time, important not to postpone. Inflation around 1.7% by 2020 is broadly in line with the definition of price stability”.
It seems that Weidmann is against the publishing of full details of ECB interest rate hike path and also blamed ECB for the market confusion about first rate hike before the end of bond reinvestments, terming the current guidance on the timing of the first rate hike as “vague”. He also downplayed the soft EZ economic data in Q1 and called for a slow and gradual normalization without postponing it abruptly. Weidmann also sees EZ inflation at 1.7% in 2020 as a sign of price stability, but it may be lower than market expectations.
Thus, BUBA chief Weidmann, a known ECB hawk sounds less hawkish than expected and as a result, EUR also extends its slump on Wednesday before the Fed.
EUR was also a victim of increasing “translantic” spread (the difference between US and GE bond yield), which was hovering around 0.40% as US 10Y bond yield was around 3%, while 10Y GE bund yield was trading around 0.60%.
Overall, EURUSD may be a victim of monetary policy divergence between ECB and Fed, lower interest rate/bond yield differential, continued soft economic data in EZ and a perception that US MNC may use Q1/H1-2018 to repatriate cash to take advantage of Trump’s tax reform (higher USD fund flow).
On trade war front, Germany’s economy minister Altmaier sounds little desperate on Wednesday, abandoning the EU policy of “all for one and one for all” approach. He said, “EU member states must decide among themselves how to negotiate with the US on trade” and “EU and US must try to find a balanced solution in trade conflict”.
On the great Italian political saga, Lega's Salvini warned on Wednesday to either form a (“bizarre coalition”) government with Five Star Movement or face a new vote
Technical View (Positional):
Technically whatever may be the narrative, EURUSD now needs to stay above 1.19500; otherwise, it may further fall to 1.19150-1.18450/1.18050 and 1.17780/1.16750-1.15500/1.14850. For any meaningful recovery, EURUSD must stay over 1.21000-1.21600 for 1.22000-1.22350-1.22500 and further 1.23100/1.23550-1.24200/1.24600 and even 1.25050 in the coming days. Any technical bounce back (short covering) till 1.20600-1.20800 may be a dead cat bounce for the EURUSD as of now.
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