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Forex markets: The euro has slipped, but less than it could have

The euro has slipped, but less than it could have: last call for EUR/USD 1.3000 after Sunday’s elections…..  


          For professional investors and advisers only


          The BoE meeting on Thursday will also be important: lacking further monetary stimulus, the pound’s fluctuation range should stabilise at a higher level.
          EUR – The euro dropped this morning, penalised by poor European data. However, the decline was limited: from a high of EUR/USD 1.3284 to a temporary low of 1.3095. The ECB’s message (inflation risks balanced, no longer skewed to the downside, and lingering risks to growth) contributed to weakening the exchange rate, albeit very marginally. Breakthrough of the 1.3165 support technically exposes the euro to a further drop in case of a negative outcome of Sunday’s elections – with Greece at the fore. Targets levels for a further downward movement are identified at 1.3030-1.3000. However, for some time now the euro has been displaying a certain degree of downside resilience, therefore the risk is that even in the presence of negative triggers, the exchange rate may stay within the range. In the past month, the trading range has been very narrow: 1.30-1.32. Therefore, we stick to our view that in the short term the euro may correct to below EUR/USD 1.3000, while stressing the risk that this movement may be further delayed. A comparison between the exchange rate’s dynamics, and the dynamics and levels of short-term yields in Europe and in the USA, may provide some explanation of the exchange rate’s downside resistance. Indeed, EUR yields are close to zero, and therefore cannot drop further, while US yields cannot rise as the Fed has reasserted its intention to keep rates stable until well into 2014. Another factor countering downside pressures on the exchange rate, tied to unfavourable developments on both the macro front and in terms of the debt crisis, is the persistence of large short euro positions on the market. Risks, however, seem more skewed to the downside than to the upside, at least in the short term.
          GBP – The opposite could be true for sterling, i.e. a prevalence of upside risks despite more recent economic data proving more negative than expected. The BoE will meet on Thursday, and consensus expectations, which we embrace, do not see further monetary expansion, with stable rates. If the BoE opts against expansion in May, it probably intends to “definitively” renounce this option. This would be a supportive factor for sterling, not necessarily in the sense that it could kick off an uptrend, but rather due to the possibility that it may raise the fluctuation range slightly, hindering its return below GBP/USD 1.60 and, more importantly, prevent it from sliding back to below GBP/USD 1.56-1.55. Therefore, our 3m projection for an exchange rate of less than GBP/USD 1.55, may be revised upwards. Crucial factors in this respect will be (i) the outcome of the BoE meeting of 10 May, and (ii) the inflation report of 16 May.
          JPY – Not much is happening around the yen, which could stay put at around USD/JPY 80.
          Downside breaches of 80.00 cannot be ruled out, but the Japanese authorities are ready to intervene in the event of deep movements beneath this threshold.


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