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FX Update: ECB makes some noise, gets a bit of respect.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The euro is bid today on fresh rhetoric from the ECB indicating an impatience to get going with policy tightening, taking short yields to new highs for the cycle and taking EURCHF sharply higher through notable resistance, while the contrast with the very down-beat Bank of England yesterday has EURGBP continuing its ascent. The USD wrecking ball, meanwhile, swings menacingly in the background.


FX Trading focus: USD back on the rampage. The euro gets some respect on latest ECB jawboning

I wrote yesterday’s update as the reaction to the FOMC meeting was rapidly unfolding, with the later action, of course, entirely reversing the USD weakness the meeting inspired. It is remarkable that sentiment couldn’t piece together more than a single day squeeze higher on the back of the FOMC. The follow-through higher in the US dollar today has been halting in places, but it is clear that the US dollar wrecking ball is swinging in full unison with risk sentiment. Also, the spin for US yields is that the less hawkish than expected FOMC can prompt the longer end of the US yield curve to come more unhinged, or at least that is what it has done, with the 10-year US treasury yield trading north of 300 basis points, the psychological resistance, and now not far below the 325 basis points high of late 2018. Certainly worth noting that if that benchmark yield clears that 3.25% level, it would be the first new 10-year+ high in long yields since…1981. The rising US yields and yields elsewhere have the JPY on the defensive broadly, with USDJPY back above 130.00 and EURJPY poking at two-week highs.

The euro boost comes as ECB expectations are rising sharply again on the back of fresh rhetoric indicating more urgency to kick off the rate tightening cycle. The ECB’s Villeroy, Nagel and Vasle today all indicated a strong lean for getting going, with Villeroy saying the case for ECB net debt purchases after June is “not obvious” and that it is “reasonable” to expect rates above zero by year-end. The Bundesbank chief Nagel said the ECB must get on with normalizing policy and that it shouldn’t hold back just because of the difficult backdrop, and Vasle saying it would be appropriate to raise rates “before summer” – which means at the June 9 meeting – where the odds remain low for a hike. This has helped the euro higher against the lowest yielding CHF and the JPY punching bag (nearly every time yields rise) as EU longer date yields also rose to new highs for the cycle. The German Bund yield has touched 1.00% in recent days.

US April jobs data is up today – more interested in the Earnings figures and whether they stoke the narrative of a developing wage-price spiral, but a bad miss on payrolls growth after the weekly jobless claims ticked back to 200k for the first time since February could begin to pique interest in whether the labor market tightening has peaked.

Chart: EURCHF
EURCHF is the focus of the day as the ECB earns some respect from the market in signaling more urgency to kick off its tightening regime. The price action has taken the pair above the well-defined 1.0400-area resistance as the yield spread has stretched some 100 basis points in the euro’s favour for 2-year since early March, more than off-setting now, apparently, the existential concerns that are burbling in the background as the Germany-periphery yield spreads widen. The 1.0500 area 200-day moving average is the next area of interest.

Source: Saxo Group

EURNOK touched 10.00 and higher yesterday on the swoon in risk sentiment, but also as the Norges Bank re-committed to its sedate 0.25% per quarter pace of tightening rates, with the Norwegian policy rate now below that of the UK (not including when rates were pinned close to zero everywhere in 2020-2021, this is the first time that has been the case since 2007. Fresh sharp gains in crude oil prices today are helping the NOK fight back, but it will remain vulnerable if sentiment is ground lower by the strong USD again.

China overnight doubled down on its “dynamic zero Covid” policy, with the Politburo spelling out its commitment to continue the policy in no uncertain terms. Given the new variants’ transmissibility, this looks like a monumental task and risks keeping the Chinese economy mired in stasis at best for at least another couple of months and likely longer, further reducing real global growth and like stoking inflationary outcomes on further supply chain woes. The Aussie could prove the chief victim among G10 currencies on this on top of its traditional vulnerability to downdrafts in risk sentiment. Watching the pivotal AUDUSD level at 0.7000 on that note.

Table: FX Board of G10 and CNH trend evolution and strength.
The pop in the euro is beginning to show, while sterling is stumbling and NOK still weak despite crude oil rise, a testament to the slow-going Norges Bank and weak risk sentiment….

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note CNHJPY trying to tip lower – will have an easier time of it if long global yields stop rising. EURAUD is also trying to turn positive in an interesting area around 1.5000.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Apr. Nonfarm Payrolls Change
  • 1230 – US Apr. Unemployment Rate
  • 1230 – US Apr. Average Hourly Earnings
  • 1230 – Canada Apr. Net Change in Employment / Unemployment Rate
  • 1315 – US Fed’s Williams (voter) to speak
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  • 1900 – US Mar. Consumer Credit 

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