Of the world’s major currencies, the euro has been among the hardest hit in recent weeks. A sixth consecutive week of losses has seen EUR/USD fall into the mid-1.16s, to a six-month low; EUR/JPY to the mid-127s, to an eleven-month low; and the past fortnight’s fall in EUR/CHF from levels near 1.20 to 1.155 represents the worst two-week period for the cross since 2015’s “francogeddon.”
Acting to offset the recent disappointments in eurozone economic data, as well as what many consider to be extremely euro-negative political developments in Italy (allegedly, Lega Nord and the 5-Star Movement are close to agreeing terms for a coalition), will be Thursday’s eurozone inflation data for May, which, if all goes to plan, should rebound strongly to 1.6 percent on an annualized basis, from 1.2 percent in April. This data should, according to analysts at ING, be enough to place a “soft lid on the extent of the [euro’s] decline.”
Cautious on the euro’s short-term outlook are technical analysts at Scotiabank. As grounds for optimism, in its latest commentary the bank highlights the heavily depressed, or “oversold,” RSI readings on the daily charts of important euro exchange rates, but also notes that “we have seen positive technical signals deliver only marginal and brief gains for the euro in the past, so we remain wary.”
For EUR/USD, Scotiabank says that a buying opportunity within reach next week will be 1.155, that being the pair’s lowest level in the past ten months.
It’s been a fine run for the US dollar over the past month. Since breaking from a ten-week period of congestion towards the end of April, the Dollar Index (a measure of the dollar’s performance relative to a basket of currencies) has climbed to a six-month high of 94.3.
The coming week encompasses the first Friday of the month, which all investors know to be US payrolls day, and needless to say, the headline payrolls and earnings growth figures will be the biggest influencers of dollar movement this week.
If the market consensus for 190,000 new jobs and for earnings growth of 2.7 percent, up from 2.6 percent, should prove somewhat accurate, then the data would cement expectations for a “gradual” process of policy normalization by the Federal Reserve and may give the dollar a slight boost.
Offering a warning last week on the dollar’s medium-term outlook was Citibank.
“Recent dollar strength was fueled by a positioning squeeze rather than anything meaningful on the fundamental side,” said one of the bank’s Hong Kong-based analysts.
“In the medium term, the dollar downtrend may resume…[because] the fiscal boost may cause a further deterioration in the twin deficits.”
“The dollar may have 5 percent downside over 6-12 months,” the analyst concluded.
The Japanese yen is the only currency among the majors to better the US dollar this year. Though it suffered eight consecutive weeks of losses to the week ending May 18th, weakening in the process to levels around 110.75 per dollar, the yen was, even at that point, comfortably stronger than January’s opening rate of 112.65.
The yen was well supported last week as investors sought safe havens amid political uncertainty in Europe, the cancellation by Donald Trump of his meeting with Kim Jong-un, and the return of global trade tensions (according to reports, the US commerce department has begun investigating automobile imports for reasons relating to national security, ringing alarm bells for some investors). Before the week was out, support for the yen had driven USD/JPY down to 109.36, from Monday’s extreme of 111.40.
The coming week brings with it Japanese industrial production and retail sales data for April but neither are likely to be market movers, and with that said, over the coming days, broadly, the yen will continue to be driven by risk sentiment; although, like all dollar pairs, USD/JPY is likely to lack volatility ahead of Friday’s payrolls data.
Early next week, traders should have their eyes and ears open for an announcement by Washington that President Trump’s meeting with Kim Jong-un is back on. This, which was raised as a possibility on Friday, would likely see the yen give back a good portion of last week’s gains.
The medium-term outlook for the yen is good, according to Citibank, given the potential for reduced quantitative easing in Japan and for changes to the Bank of Japan’s program of “yield curve control,” the latter being an attempt by the bank to promote lending by guaranteeing a gap between short and long-term interest rates.
Citibank is forecasting a USD/JPY rate of 105 within twelve months.