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Forex markets: Contrary to the dollar and the euro, sterling strayed from the trading range

Next week the dollar could receive some support from the FOMC….   


          For professional investors and advisers only


          The euro has been resilient in recent days, but is still at risk of a correction: market movers due over the next two weeks.
          Sterling appreciated, this time compatibly with data: only disappointing Q1 GDP growth could bring it back down already next week. The yen reversed its trend following the BoJ’s declaration of intents: further retracement expected next week, if words are followed up by action.
          Another interlocutory week on the forex markets, if not for a few, isolated cases. On the other hand, next week could bring some more directional movements, as the calendar of data releases and events is very busy. Monday will also see the market digesting the outcome of the G-20, under way today, and of the first round of the French presidential elections.
          USD (nominal effective exchange rate) – The dollar continued to range trade on the whole, albeit mostly at the lower end of the range. Mixed US data release in recent days did not allow the dollar to fare better. However, there will be at least two important events next week: the FOMC meeting on Wednesday evening, and the first estimate of Q1 GDP. Should the Fed start to hint at a round of QE3, the dollar’s reaction could initially be a decline, but this should then be followed by a recovery and a strengthening. However, a wait-and-see stance still seems to be more likely. In any case, the new forecasts on the trend of the economy and interest rates, to be disclosed at the end of the FOMC meeting, will be important. Barring clearly pessimistic indications, the dollar could start to rise back from this week’s lows. Support should also come from GDP data, if not disappointing.
          EUR – The euro also range traded. It breached EUR/USD 1.3000 on the downside and 1.3200 on the upside, but failed to effectively break through these levels. Some economic data helped the
          euro, such as the ZEW index, which rose as opposed to expectations for a decline, and the nonnegative outcome of the “feared” Spanish auctions. However, in our view the most supportive
          factor for the single currency was the increasingly large size of short euro positioning trades on the speculative market the previous week. Therefore, the situation may be reversed. Next week, flash PMI data will be released. If disappointing, a correction towards/below 1.3000 would be rather likely, unless the outcome of the G-20 and of the French elections prove to be especially positive. If on the other hand economic data releases surprise on the upside, the euro could breach the resistance at 1.3230 and press on towards 1.3300 – although up to that level the possibility of a broader and more decisive correction within the following week would not be compromised, in the run up to the next ECB meeting (3 May) and to the elections in Greece (6
          May).
          GBP – Contrary to the dollar and the euro, sterling strayed from the trading range, appreciating to over GBP/USD 1.60 and below EUR/GBP 0.82. This time, the movement was compatible with data releases. Inflation was higher than consensus estimates, the unemployment rate dropped
          (although this could be a temporary development), retail sales comfortably beat expectations, and the BoE minutes sent off some hawkish signals. Indeed, the minority that voted for a further expansion of the APF last month has halved: Posen joined the ranks of the majority and Miles was left alone requesting additional quantitative stimulus. The BoE is revising short-term inflation upwards, and fears this may have negative repercussion on medium-term prospects, although it has opted not to express its view on this until the May Inflation Report (16 May). The largest risk in the eyes of the central bank still seems to be the situation in the euro area, which is hard to forecast; therefore, next month’s meeting (10 May) will be rather challenging. In the meantime, next week (Wednesday) the first estimate of Q1 GDP is due for release, and should show a recovery (albeit weak) to +0.1% q/q, from -0.3% q/q in Q4. Disappointing data would result in a correction of sterling to back below GBP/USD 1,6000 and above EUR/GBP 0.8200.

          JPY – The yen also expressed a clear trend, on the downside. Following the BoJ’s verbal reassurance on its intention to adopt further expansive measures in order to keep pursuing the new inflation target laid out, the Japanese currency interrupted the appreciation observed in recent weeks, and slipped back from USD/JPY 80 to 82.00. If new measures are put in place already on occasion of the BoJ meeting scheduled next week, the exchange rate should manage to breach USD/JPY 82.00 and to start to proceed towards USD/JPY 83-84.


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