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Forex markets: Euro: conditions seem to be in place for a correction

The movements seen on the currency markets this week were not guided by fundamental factors. Some trends may reverse net week. For the euro in particular, conditions seem to be in place for a correction…  

          For professional investors and advisers only

          The week that is coming to a close lacked especially important themes on the currency markets. The dynamics observed may therefore be generally considered of little interest, and should not be read as indicative of trends.

          USD (nominal effective exchange rate) – The dollar weakened, although the movement was mitigated by Chinese data, which on the whole drew a positive picture for the Chinese economy. Next week more important economic data will be published in the United States, with figures referred to April at the fore. Data should suggest a stabilisation rather than an expansion of economic activity, but this could in any case be enough to allow the dollar to recover part of the ground lost in the past few days.

          EUR – By contrast, the euro strengthened. The single currency was helped by the statements made by Mr. Coeuré of the ECB, who managed to ease (limitedly and temporarily) market concerns over Spanish debt. Coeuré reminded that the ECB does not lack the necessary instruments to carry out its job on this front (Securities Markets Programme). However, the Spanish problem is far from being resolved, and in the run-up to important elections (in France on 22 April and in Greece on 6 May), some tension should linger on the markets. The tension factor is negative for the euro, and on Friday the G-20 will open. In this context, the euro could suffer an erosion of this week’s gains, which saw it rise from lows of 1.30 to highs in the low EUR/USD 1.32 area. Technically, the important support to break through in order to allow a downside acceleration below EUR/USD 1.3000 is 1.3030 – a level left untouched this week. Important data are due in the week ahead, ZEW and IFO first among them. Negative numbers would aid a correction of the exchange rate, with at least an attempt to drop below the EUR/USD 1.3000. The important intermediate downside target is EUR/USD 1.2827. The market is still prevalently short euro, and this could further postpone the decline towards that level. However, downside factors will mostly be concentrated in the short term (1m).

          GBP – Sterling tracked the euro against the dollar, climbing back from GBP/USD 1.58 to almost 1.6000. However, this movement was not justified by fundamentals. What’s more, the only important data release in recent days was markedly negative: February trade balance figures showed a sharper-than-expected increase of the deficit. Based on our estimates, the contribution of net exports to Q1 2012 growth should be zero, or even negative. In our view, the data released so far may justify further monetary stimulus by from the BoE. To this avail, it till be useful to read the minutes of the latest BoE meeting, due for publication on Wednesday, to verify whether a majority stance is taking shape within the MPC, or whether the split is still evident. Other important data releases will concern inflation, the labour market, and retail sales. An unexpected rise in inflation would strengthen sterling against both the dollar and the euro. In order to compress the pound towards GBP/USD 1.57-1.55, at least the other sets of data need to be negative. A decline of the EUR/USD exchange rate would also aid a correction of the GBP/USD.

          JPY – The yen strengthened at the start of the week in the wake of (1) renewed risk aversion, and (2) inaction of the BoJ, which opted against introducing new expansive measures at its latest meeting. However, the movement was restricted to between USD/JPY 81 and 80. The BoJ also confirmed verbally that monetary policy will be further eased. This prevented the yen from strengthening more, and prompted a timid, incipient pull-back. Lingering market tensions  next week may hinder a stable return into the area above USD/JPY 82.00. However, barring disappointing US data, at least a foray above that threshold should be likely.

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