Euro keeps grinding higher
The pair marked the new peak in the Asian session, reaching 1.3316 and has since only mildly pulled back. Ranges in Asia were very tight as Hong Kong and China were away for the Dragon Boat Festival. With signs that economic activity in the Euro area is beginning to stabilize, the Euro is showing some resolve. Recent unemployment figures out of Spain were probably signaling a turnaround, trade balance figures are solid.
The most concerning trend comes out of Italy
As the most traded pair is moving on to mark yet another three month high today we will turn the heads of binary options traders to the EUR/USD again. In all countries except Germany, real GDP still is below the level it was at the beginning of 2008. The most concerning trend comes out of Italy, where there are ongoing downside data surprises and still no gains in productivity as has been observed in Spain. Hence the ECB is to remain in an active easing mode.
The central bank is running out of conventional tools to ease monetary policy but is quite unlikely for now to engage in large-scale asset purchases, also being called OMT (Outright Monetary Transactions).
Under normal circumstances that would keep the EUR under pressure, but the recent correction playing out in the USDJPY pair is playing into the Euro’s favor right now. The ECB didn’t rule out negative deposit rates but there is clear resistance to go down that path in the Governing Council of the central bank.
With expectations that the second half of 2013 will bring gradual recovery, markets do not favor that outcome as of now. It all could rapidly change however if we get a new string of disappointing data surprises.
On the other hand fiscal consolidation efforts in the US are having an impact on growth and scope is for GDP to expand at an annualized rate of just 2% in the second half. That said, into 2014, US expansion should gradually pick up, given a substantial reduction in the drag from fiscal tightening.
Recent suggestions by various FOMC officials that they see a bigger possibility of a tapering in the pace of asset purchases this year, the baseline scenario remains that the Fed will continue to buy securities through the year and begin to gradually reduce pace only in Q1 2014, while possibly ceasing next June. As this scenario unfolds in the long run we remain bullish on the dollar, however if we look at the charts today we see a different picture.
Overall sentiment has shifted in favor of the bulls, as the major trend reversal happened on the break of 1.3055. Focus of binary traders should turn to Asian session highs at 1.3316-20 area which is reinforce by the February 26th pullback high.
Any decisive break above should yield 1.3400 initially and a test of major resistance at 1.3460. Initial downside support is at 1.3270, followed by 1.3230-35 as yesterdays low. Our recommendation is to buy calls on an hourly basis should we see a test of the downside levels mentioned, with more emphasis on the latter.
European calendar is heavy with CPI releases across Europe between 06:00 and 08:00 GMT and industrial production at 09:00 GMT. Possible headlines should come from the ongoing German constitutional court OMT hearing. US calendar remains light, with heavier emphasis on it coming tomorrow, when retail sales figures for the month of May are reported.