The EUR/USD continued its sideways trading in today’s session, as declines overnight came close, but did not match the lows from the previous 2 sessions.
The EUR along with the commodity bloc of currencies – AUD, NZD, CAD – fell in Asian trading amid another drop in silver and gold. Silver continues its correction following the pair’s strong surge in the past few weeks that had left the previous metal overstretched just below the $50 level. Since then the correction has been sharp and volatile, as sell-off overnight is met with buying around the start of NY time, only to fall again by NY afternoon. The fall in precious metals put some pressure on investor risk sentiment in the Asian session, and we saw the USD gain at their expense.
Today news that George Soros was selling silver contributed to its decline.
From Wall Street Journal: “Some major investors have been selling in recent days. George Soros’s big hedge fund, a firm operated by high-profile investor John Burbank and some other leading firms have been selling gold and silver, according to people close to the matter, after furiously accumulating precious metals for much of the past two years.”
However, it wasn’t long until the USD came back under some weakness, especially against the EUR, which climbed back to its highs for the week, testing the area at 1.49 to start NY trading.
From the fundamentals, Europe was able to brush off a poor retail sales report as well as the announcement of the terms of the bailout for Portugal.
From Bloomberg: “Portugal reached an agreement with officials preparing its European Union-led bailout that will provide as much as 78 billion euros ($116 billion) in aid and allow more time to reduce the country’s budget deficit.
The three-year plan set goals for a budget deficit of 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013, Prime Minister Jose Socrates said in Lisbon today. The government in March targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.”
The news barely registered a blip in the EUR as Portugal’s bailout has been thoroughly priced into the market at this point.
The EUR also managed to brush off a retail sales report that showed sales falling 1% in March, compared to forecasts of a small 0.2% gain.
From Reuters: “Euro zone retail sales fell sharply in March, data showed on Wednesday, indicating that rising food and energy prices were curbing household demand and that economic recovery was still mainly industry-driven.
The European Union’s statistics office Eurostat said retail sales in the 17 countries using the euro fell 1.0 percent month-on-month in March for a 1.7 percent year-on-year drop.”
That means that while the Euro-zone recovery is progressing on the back of strong industrial activity in Germany – with exports leading the way – Euro-zone consumers remain reluctant to open up their wallets. Retail sales do not constitute all consumer spending, but it shows that domestic demand is still weak in the face of some of the issues facing the Euro-zone, including government austerity measures and sovereign debt worries.
Examine the Euro-zone Retail Sales Fundamental Indicator Page.
Therefore, we can see that interest rate expectations are the main driver for the EUR here and not fundamentals. The anticipation for a hawkish ECB has been building this week, and therefore the EUR remains supported. If we indeed do have Trichet using the phrase “strong vigilance” than that would send a clear signal to the market that the ECB would like to raise rates in June and not in July, the consensus as we had come out of last week.
If a hawkish ECB is followed up by soft US non-farm payroll data on Friday, then the conditions would be in place for the EUR/USD to test the $1.50 in the pair.
Nick Nasad
Chief Market Analyst
FXTimes
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