EUR Accelerates its Downtrend, BoJ Defends its Ultra-Loose Policy

The US dollar continued to strengthen against all the other major currencies yesterday and today in Asia, with the Japanese yen and the euro being the main losers. The euro accelerated its downtrend after Russia decided to halt its gas supplies to Bulgaria and Poland, a move that increased concerns with regards to the performance of the European economy. The yen came under selling interest after the BoJ defended its yield curve control policy, putting at rest speculation over hawkish tweaks.

Stocks Rebound but Outlook Stays Gloomy; EUR Tumbles to 2017 Levels

The US dollar traded higher against all the other major currencies on Wednesday and during the Asian session Thursday, gaining the most versus JPY, EUR, and NZD in that order. The greenback gained the least versus CAD.

The strengthening of the US dollar suggests that markets may have continued trading in a risk-off fashion yesterday and today in Asia, but the weakening of the yen points otherwise. Turning our gaze to the equity world, we see that major EU and US indices rebounded somewhat — only Nasdaq stayed virtually unchanged — with risk appetite improving notably during the Asian session. Our first impression was that the BoJ decision may have had to do with it. After all, Japan’s Nikkei 225 gained the most.

Nonetheless, before we go to today’s BoJ decision, let’s start with yesterday’s European activity. The rebound in Europe was mainly owed to gains in commodity stocks, but we suspect that the reasons may have not been that healthy. Yesterday, Russia decided to halt gas supplies to Bulgaria and Poland, after the two European nations rejected a call to pay in rubles. This resulted in a spike in natural gas prices, due to concerns of supply shortages, and that’s why commodity stocks in Europe may have marched higher.

After all, the euro accelerated its downtrend, especially against the US dollar. Although several ECB officials have been calling for a rate hike in July, yesterday’s developments have increased concerns over the performance of the Euro-area economy and may have raised some speculation that the ECB may eventually be reluctant to tight so early. In any case, the further slide in EUR/USD confirms our bearish view, which we will continue to hold. Even if the ECB decides to hike in July, the Fed is expected to take a much more aggressive path, and thus, we still see ample divergence between the policies of those two central banks.

Now, back to the stocks and Wall Street, our view is that the support in US equities came from upbeat earnings results from Microsoft and Visa. That said, with the Fed expected to hike by 50bps next week, and a strong chance for a triple hike in June, we will stick to our guns that the path of least resistance for equity markets is to the downside. We will treat yesterday’s recovery as a corrective bounce.

EUR/USD — Technical Outlook

EUR/USD traded sharply lower yesterday, hit support at 1.0515, but today in Asia, it turned south again and moved passed that level. Overall, the pair remains well below the short-term downside resistance line drawn from the high of March 31st, and thus we will consider the short-term outlook to still be very bearish.

The dip below 1.0515 has not only confirmed a forthcoming lower low, but it also took the rate into territories last tested in March 2017. The next support is seen at 1.0450, marked by the low of January 11th, 2017, the break of which could carry larger bearish implications, perhaps paving the way towards the 1.0350 zone, which acted as a floor between December 15th, 2016, and January 3rd, 2017.

On the upside, we would like to see a strong and long recovery above 1.0845 before we start examining whether the bulls have gained full control, at least in the short term. This could confirm the break above the aforementioned downside line and may initially target the 1.0935 area, which provided strong support between April 6th and 21st. If that barrier doesn’t hold this time, we may see the advance extending towards the 1.1025 zone, marked by the inside swing low of April 1st.

BoJ Stays Willing to Support its YCC Policy, Yen Falls

Flying in Asia, indeed, the catalyst for the improvement in risk appetite this morning may have been the BoJ decision. The Bank kept all its policy settings untouched, noting that it will offer to buy unlimited amounts of 10-year government bonds to defend an implicit 0.25% cap around its zero target every market day.

This put at rest rumors that the Bank may need to tweak its yield curve control policy soon due to the continued tests near that cap and the weakness of the yen, and reaffirmed the strong willingness of policymakers to stay ultra-loose at a time when other major central banks have flagged aggressive tightening. That’s why Nikkei gained the most in Asia today, and that’s maybe why Asia as a whole gained more than Europe and the US. With all that in mind, we expect the yen to extend its downtrend, even when stock markets turn south again.

USD/JPY — Technical Outlook

USD/JPY spiked sharply higher during the Asian session today, breaking above 129.00 and coming close to the round psychological number of 130.00. The pair has last tested that zone back in 2002. Overall, USD/JPY has been in an uptrend mode, as market by the upside support line drawn from the low of March 6th. Although it traded temporarily below that line recently, yesterday’s advance brought it back above that line. So, with all that in mind, we will consider the near-term outlook to be overly positive.

We believe that a potential break above the psychological round figure of 130.00 could encourage the bulls to push the action all the way up to the 134.00 zone, which is marked by the high of April 2002. If they don’t stop there, then we will consider as a next resistance the 135.00 psychological barrier, which is also near the highs of January and February 2002.

In order to start examining a short-term bearish reversal, we would like to see a clear close below 126.20. This will not only confirm a break back below the aforementioned upside line, but also a forthcoming lower low on the 4-hour chart. The bears could initially target the low of April 14th, at 125.00, the break of which could extend the fall towards the 123.45 or 122.95 levels. Another dip, below 122.95, could extend the fall towards the lows of March 30th and 31st, at around 121.20.

As for the Rest of Today’s Events

During the European session, Germany releases its preliminary CPIs for April. The headline rate is forecast to have ticked down to +7.2% yoy from +7.3%, while the HICP one is anticipated to have held steady at +7.6% yoy. This could raise some speculation that Eurozone’s headline inflation rate, due out on Friday, could also stay unchanged, or slide fractionally.

In the US, we have the preliminary GDP for Q1, with expectations pointing to a sizable slowdown to +1.1% qoq SAAR from 7.1%. Such a slowdown is likely to hurt the US dollar, but we don’t expect it to result in a trend reversal. After all, the Fed has made it clear that its priority is to battle high inflation, and will do that even if it needs to hike rates by 50 or 75 bps. Remember that last week, Fed Chair Powell said that a 50bps hike will be on the table at the upcoming gathering and added that it would be appropriate to “be moving a little more quickly”, reinforcing expectations over a triple hike in June.

According to the CME FedWatch tool, participants are fully pricing in a 50bps increase in May, while they assign a 78% chance for a triple hike in June. They also see a 73% probability for interest rates to be lifted by another 50bps in July. So, with all that in mind, we will treat any potential USD slide due to a GDP slowdown as a corrective retreat and an opportunity to enter new long positions. Actually, the US dollar could even strengthen instantly in case the GDP slows by less than anticipated, as this may be interpreted as a positive surprise.


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