EUR/USD Weekly Forecast May 29-June 2
Frankfurt (May 28) EUR/USD consolidated in a range for the week, ending with a small loss after posting the largest advance since February 2016 in the week prior.
The most notable aspect of the FOMC meeting minutes that were released in the past week was that members felt it prudent to assess further data to ensure soft economic activity was transitory. The rhetoric suggests the Fed may hold off on raising rates at their next meeting, however, the futures markets have been pricing in the opposite.
The CME Group shows the odds of a June hike at 83.1% to end the week, up from the 78.5% end of week reading over the past three consecutive weeks.
Optimism for a third hike this year is also relatively high as compared to earlier this year. The futures markets are showing a nearly 50% chance of another increase by the end of the year.
An upward revision to US first quarter GDP growth to 1.2% from 0.7% may have been the confirmation the Fed was looking for to ensure transitory factors led to softer growth.
ECB President Mario Draghi reiterated that there is no need to deviate from the policy path. Despite Draghi’s persistent remarks that the ECB has no intention of tightening policy, there remains speculation that the central bank may taper or hike rates.
In this context, positioning in the euro appears extreme. Non-commercials recently shifted to a net long and three consecutive weekly builds since the shift shows the position at the largest level since October 2013. To add perspective, the ECB announced intentions to begin easing in May 2014.
The notable $3.86 billion week over week build brings the net long among non-commercials to $9.07 billion which is significantly larger than any other major currency. Following this week’s positioning shifts, the euro net long is larger than the aggregate US dollar long.
Aside from the greenback, the second largest net long among the major currencies is the Australian dollar which non-commercials are holding net long by $197 million.
The March Fed meeting set a precedent as members were able to provide a heads up for a hike in speeches ahead of the blackout period without causing excess volatility as a result of the March rate hike. The upcoming week will be the last prior to the blackout period for the June meeting and speeches in the upcoming week will clarify if a rate increase will materialize next month.
With the futures markets nearly fully discounting a June increase, Fed members will look to readjust expectations in the event there isn’t an intention to tighten.
The Fed minutes revealed that members viewed the labor markets as solid and attributed the miss in the February headline increase to transitory factors related to the weather. As such, only a significant deterioration in the jobs report, which is scheduled for release on Friday, would cause the Fed to change course.
Recent NFP reports have not had the same impact as in the past with moves often reversed with one or two days, or in the case of the April reading, within an hour of the release.
The risk to the report aside from an unlikely slump would be a further improvement to the unemployment rate. The Fed started the year with expectations for unemployment to reach a low of 4.5% this year. It reached 4.5% in February and dropped further to 4.4% in April. A further decline would cause concerns about an overheating economy and likely have the Fed once again looking at the risk of delaying normalization.
Eurozone CPI will be released on Wednesday. In the last reading, CPI rose 1.9% but analysts are looking for a decline to 1.5% in the year to May. Wednesday’s release is the flash estimate which tends to have a larger impact on the euro. A stronger than expected reading will spur speculation once again that the ECB will tighten sooner than later.
With extreme positioning in the euro and a largely expected rate hike at the June meeting, EUR/USD will likely struggle to extend gains in the week ahead. The pair has given some early indications of a turn lower as Friday’s decline has set a succession of lower highs and lower lows from Tuesday’s peak, best seen on an hourly chart. Support at 1.1168 held the decline on Friday and the recently well-respected level will be pivotal in the early part of the week.
Further downside support falls at 1.1142 which reflects the high that preceded the US elections. The level had also acted as support in late August and early September 2016. The next support level at 1.1055 was resistance in the first quarter of 2015 and in December of 2015. In the event of an upside attempt, critical resistance falls at the US election spike high of 1.1299.
SOURCE: EconomicCalendar
