Sterling, The Dollar and The Euro

From Marc to Market:

USD: Range or Trend?

The US dollar finished the week on seemingly fragile footing. The question investors are asking is if the steady drum beat of disappointing US economic data turns the dollar's bull case on it head.  The Europe and Japanese side of the divergence have not changed, but the US side has.  

On the other hand, the minus 20 bp deposit rate is not the floor for short-term rates in the euro area.  A resolution of the Greek issues continues to prove elusive.  The outcome of the UK election on May 7 also poses substantial risk.  We suspect there can be a dramatic response if the US Congress fails to grant the President trade promotion authority (fast-track).   The US April employment report on May 8 will be more important than usual, especially after the disappointing March report.

The euro, sterling, and the yen haven largely range-bound for at least the past month.  Our reading of the technicals suggests there is more room before the dollar's lower bound is met.  For the euro, that is found in the $1.1000-50 area.  Against the yen, the lower end of the dollar's range is near JPY118.00, but there is technical support in the JPY118.30-50 area.  

Sterling is the most interesting of the three from a technical perspective.  Leveraged accounts reportedly have begun positioning for a post-election sterling recovery, and this appears to have help push cable to its 100-day average ($1.5185) for the first time since late February, when it was turned back from that average.  It has not been above its 100-day average since last August.  A break above it would target the $1.5250 area immediately and bring the top of this year's range (~$1.5500-50) into view.  

The upside momentum carried sterling past the top of its Bollinger Band (~$1.5120), as stops were triggered.  The market is stretched, and some near-term consolidation is likely.  The risk is that it is short-lived and that the market uses a constructive Q1 GDP report on Tuesday (expected 0.5% quarter over quarter) to extend sterling's gains.  However, we will be attentive for a reversal pattern the on daily charts, and more inclined to see this rally as a better selling opportunity....

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