EURUSD – not only a strength of the dollar

Last week brought a significant correction on the EURUSD. That was partly a reaction to the situation on commodities but ECB played some role as well. This second piece may have much more important impact in the medium term.

When it comes to the dollar, it is still hard to find an argument for a medium to long term advance. Sure, the Friday's payrolls report turned out to be stronger than expected (employment increased by nearly 250k) but that merely covers up negative surprises from ISMs and claims and is highly unlikely to change the line of reasoning at the Fed. Therefore, last week’s appreciation of the dollar seems as a side-effect of the tumble on commodities.

End of the story? Not really. The EURUSD is driven by two forces and a role of the ECB is not to be underestimated here. After the first hike in April some started to speculate even about four moves this year. Trichet’s speech – while not really so dovish, helped to tame those expectations a bit a provided a cold shower for euro bulls. Consequently we saw two forces working in the same direction, sending the pair from nearly 1,50 to almost 1,43. And while we do not expect the dollar to regain interest (at least not yet) the ECB might be a leading factor on the pair in the mid-term.

From the technical point of view, breaking the support levels around the 1.45 level (including the trend line and 28-day average) was a serious warning signal for bulls. Breaking the next key support (1.4150) would mean the end of the upward trend, as it would set an important minimum lower than the previous one. However, there is still a lot of space before we reach that level. An upward attempt at the beginning of this week is not unrealistic and consequently some kind of a H&S formation might be in the play.

Key reports on the commodities markets

Last week's declines in commodity prices are not directly connected with the fundamental situation on those markets. Nevertheless, given the circumstances, any drivers – including those of the fundamental nature, may have a significant impact on the market. Some important monthly reports will be released this week: for the oil market the most important will be the OPEC report (Wednesday) and the IEA report (Thursday), for the soft commodities markets it will be the USDA report (Wednesday). USDA report will be particularly important since it will give the first estimate of production for the next season.

Events to watch

Monday's calendar is not impressive. The number of housing starts in Canada is the key figure today  (14.15 CET, 8.15 ET). China will release the data on the trade balance during the Tuesday’s Asian trading. Data from China may be very important for the markets, especially those concerning consumer prices . Should inflation be higher than expected, a further decline on commodities would be natural. In the second half of the week the market will focus on the data from U.S. (retail sales and consumer prices).    

Paweł Kordala

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