EUR/USD: Diversification vs US rate hike

EUR USD (1.2680)
The euro put up a brave fight to the upside in European trading on Tuesday. But this was not enough as it was finally sold off to a 1.2565 low in the NY session where it was left slumbering right into the FE this morning. It seems as if traders were very much caught between the devil and the deep blue sea – do they buy on diversification rumours or sell on US interest rate expectations.

When the single currency was exploring the upside in European morning trade yesterday, talk about China’s Statistics Bureau’s call for the diversification of reserves sounded like a plausible reason to buy. Despite these types of calls not being new, one is also not that sure to what extent they can influence FX policy. Moreover, the probability is rather high that there would always be somebody somewhere calling for the diversification of reserves as it is continuously under consideration by different central banks. Nevertheless, with the market looking for clues about the future of US rate hikes, the better than expected consumer confidence number yesterday just provided those who wanted to sell the euro with a reason to do so. Not only was the market looking for fresh impetus, but with the expectation having been much lower this was probably even perceived more strongly. In this respect, a result in line with the expectation would have also probably been enough to see the euro tumbling, particularly against the backdrop of the higher 10 year treasury yields and some traders being jittery about today’s German IFO number.

The euro is neutral following the knee-jerk sell-off which undercut our 1.2610 risk-limit. To the downside, we expect to come across demand points at 1.2520 and thereafter only at 1.2385. Overhead, supply lurks at 1.2650.

USD JPY (117.05)
Also here the PBoC story caught the attention with some traders getting all excited. In addition, the BoJ’s Suda also cautioned about the BoJ policy being ‘behind the curve’ and put the idea of a BoJ rate hike later this year back on the agenda. However, traders wanted to buy the dollar and simply ignored any yen positive news. Instead, they preferred to focus on rate expectations and the auctions of US debt today and tomorrow which they believe will lure in some dollars and will keep it buoyant. The dollar recovered in the afternoon on the back of the US data release and remains neutral and stable. On the upside, be on the lookout for some hurdles at 117.85 and 118.30 which is, however, the current risk. For today we envisage supports at 116.50 and at 115.50/60.

EUR JPY (147.25)
The single currency still finds itself full of vigour and it remains eager to drive to new record levels. We expect that the next upside attempt could stretch to 148.30 after which it should be well on its way to the even loftier 149.30. Any move down should run into support in the 146.50/70 zone. At the last mentioned point we would again opt for a bullish strategy with a tight limit. We still earmark the second resistance to serve as target in the event of a positive orientation. For the time being critical support is visible at 145.50.

EUR GBP (0.6830)
Our objective remains 0.6730. The cross showed some buoyancy, but without any meaningful recovery attempt. Further weakness can count on some buying interest at 0.6800. On a bounce our 0.6860 risk-limit to the bearish orientation should not be violated.

GBP USD (1.8415)
With news flow in the UK rather on the thin side, Sterling slipped along with the EUR/USD and appears to be in a vulnerable position this morning. The current objective is a return to 1.8185. Any move down could expect intermediate buying interest at 1.8325. The limit to the bearish orientation must be kept tight at 1.8485/90.

AUD USD (0.7560)
It seems as if Australian CPI data this morning just further fuelled expectations of a RBA rate hike, but the AUD remains shy ahead of our 0.7570/75 resistance. Beyond there, the upside is open for gains to 0.7670. The latter could even be treated as a target while 0.7530 is not undercut after that.