- Joseph Barreca
EUR/USD: the battle of the speakers
Asia overnight
Investor sentiment was caught between growing hopes of a Fed pause in hiking rates in June and a slip in confidence the US will avoid a debt default. Fed Chair, Jerome Powell, broke the recent run of hawkish rhetoric from Fed speakers by reiterating on Friday that a pause in rate hikes was possible. While there was a phone call between House Speaker Kevin McCarthy and President Joe Biden over the weekend, which was characterized as productive, other rhetoric on debt ceiling negotiations were less positive. Republican negotiators are saying the White House is being “unreasonable” and the Democrat negotiators are saying the deal being offered by the Republicans is “unacceptable”. Most Asian bourses were trading modestly higher and S&P500 futures a little lower, at the time of writing. Most G10 currencies were trading tight ranges during the Asian session. The SEK was the top performer with the CHF and JPY close behind. The CHF and JPY were given a boost by US debt ceiling negotiation concerns as well as lower UST yields. The NZD was helped along by an RBNZ survey showing households still expect above target inflation in a year’s time.
EUR/USD: the battle of the speakers EUR/USD has consolidated after the latest USD rebound has lost momentum amidst lingering debt ceiling uncertainty while the EUR seemed to benefit from persistent investor optimism that last week propelled the German DAX to all-time highs while other European stock market indices moved closer to record highs. We continue to think that EUR/USD has peaked and could remain a sell on rallies in the near term. On the USD side, the market focus will likely remain on the ongoing debt-ceiling saga in the US congress as well as the quality of the incoming US data – the May PMIs due tomorrow and the April Core PCE on Friday. We continue to expect a timely compromise to extend the US statutory debt limit to give the USD a boost. In the case of the EUR, focus will be on the Eurozone May PMIs tomorrow and the German May ifo on Wednesday as FX investors look for any evidence that the recent weakness of the manufacturing PMIs has spread to the services sector and thus added to the headwinds for the Eurozone economy.
On the day, focus will be on speeches by both the Fed and the ECB. On the Fed side, we have James Bullard, Raphael Bostic, Thomas Barkin and Mary Daly. We will also get to hear from the ECB’s Boris Vujcic, Luis de Guindos, Robert Holzmann, Philip Lane, Francois Villeroy and Pablo Hernández de Cos. The policy- makers’ comments could discourage rates markets from pricing in Fed rate cuts in coming months while they could confirm that the ECB policy cycle is close to peaking. We continue to think the EUR-USD rate spread has now peaked and could head lower in the near term, dragging EUR/USD down with it.
USD/JPY: overly confident? USD/JPY has been boosted by two things of late. First, investor confidence a debt ceiling deal will get done between the Republicans and Democrats. We have noted in earlier research the JPY is a significant beneficiary of US default risks. Second, the market raising the risks of the Fed continuing to hike rates in June. Both themes have taken a hit of late. While talks between Republicans and Democrats continue to be characterized as “productive” by both sides, the rhetoric from meetings over the weekend has shifted less optimistic with the Republicans saying the White House is being “unreasonable” and the Democrats saying the deal being offered by the Republicans is “unacceptable”. USD/JPY will continue to track debt-ceiling negotiation headlines this week, especially with US Treasury Secretary, Janet Yellen, pouring cold water over the analysis that if the government can last until 15 June and when a round of quarterly corporate tax receipts comes in, the X-date could be stretched to July. Yellen said the government’s cash reserves would not last that long. The second support for USD/JPY has also taken a hit with FOMC Chair, Jerome Powell, indicating again on Friday a pause in rate hikes in June was definitely a possibility, which served as a reminder and was counter to the run of hawkish talk we have had from other FOMC members saying a rate pause in June was not a certainty. US PCE deflator data will therefore also be important for the USD/JPY this week.
Looking for Education & Signals?
We are a team of professional and ex-institutional traders brought together with the single goal of getting nothing but exceptional trades and education for Retail Traders of all backgrounds and experiences. With over four years of history, 2000+ members, and six staff members, we bring you EliteTraders. We provide both Swing and Day trades with developed, optimized strategies. We utilize each of our trader's strengths to capitalize on any market condition.