EURUSD – euro moving lower, peripheries on the watch

Despite a very strong support at 1,4150 (previous local low and 38,2% Fibo of the whole previous rally) the euro fell further against the dollar on Friday afternoon and a weak opening on Monday suggest that what we see on the pair is not merely a typical correction in the upward trend.

Since the ECB signaled a “no hike” in June, investors refocused on peripheries of the zone and the news coming from Greece might be indeed worrying. European leaders and the IMF were bound to look for solutions for Greece but with the IMF’s chief under arrest any solutions might be delayed. While it doesn’t materially change the outlook, it prolongs a period of uncertainty which means a possible downward potential for the pair.

The pair is close to another support: a combination of a psychological 1,40 and 1,4020 (local low from late March and a local high from early March). This might provide an opportunity for a rebound but even if that’s the case, we could anticipate another selling wave coming afterwards. 

Equity markets – sell in May and go away?

This week didn’t start well on equities, with Japan going down on some “aftershocks” of the quake which caused nuclear risks at Tepco power plants. There are rumors that the government will pressure the banks to take haircuts from the loans to the Tepco to save the utility giant in the face of massive claims following the disaster. That would obviously translate into credit losses in the Japanese banking sector.

This, in addition to renewed concerns over Greece and a sell-off on commodities, poses questions if equity markets are ripe for a correction. Despite an unfavorable environment, a reversal wasn’t neither strong nor convincing – there is still no dominating story to pave a way for a stronger sell-off.

If there’s going to be nothing other than commodities we do not see a stronger correction taking place. What else could we face? Well, Greece comes to mind first. A sudden decision on restructuring (in our view ultimately unavoidable) would send a negative impulse as the same would be expected in case of Ireland and Portugal. However, European politicians have already accustomed us that they’re able to postpone things, so it may take a while.

US economy is the other issue. So far the evidence behind a “soft-patch2” theory is still somewhat short. Weaker activity measures and higher readings of unemployment claims doesn’t need to translate into lower output, employment and sales. But it’s worth to stay vigilant – it was mainly the US economy sending equities down some 20% in the middle of last year.

Events to watch – Euro-talks, US data and Fed minutes

The meetings in Brussels starting today might have a material impact on the euro. The aid for Portugal is to be reaffirmed today and the leaders are expected to consider more favorable terms (of the aid) for Ireland. However, until the reassessment following the IMF’s mission to Greece is complete, details of a fresh aid for Greece will not be decided. While this is crucial for investors at the moment, there are rumors that under current circumstances, the details might not be ready in May.

There are important US releases this week as well. The data on output, residential market and regional activity may confirm or deny the soft-patch2 hypothesis with important conclusions for equity markets. Today, the NY Fed activity index is to be released (8.30 ET, 14.30 CET, consensus 20 pts.).  

Two Fed-related issues this week will provide an opportunity for the euro-bulls to fight back. Today’s speech from Ben Bernanke (10.00 ET, 16.00 CET) and Fed minutes on Wednesday might serve as a reminder of how dovish the Fed still is.   

Przemysław Kwiecień PhD, Chief Economist

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