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Andreas Zanin
Analysis | April 27, 2021

KTM FX Weekly: Overbought EUR ahead of the Fed meeting

  • Largest April month gains since 2015
  • EUR halted the gains after rising more than 3% this month so far

The common currency rallied this month to continue signals that the European growth story should be recalibrated by economists and reduce bond purchases after the June meeting by the ECB. Most analysts expect a reduction of the Pandemic emergency purchase program (PEPP) is the next direction for the EUR. Besides, Eurozone bond yields continue to climb on Monday.

Firstly, in the money market, Germany’s 10-year yields, the benchmark for the EZ, have outperformed US yields. Since the beginning of this year, both the results rallied, but US yields peaked at 1.75% and now settled below 1.60%. At the same time, Bunds continue to shine with trading at a February 2021 high of -0.23. Visually the US is leading the recovery phase and well in advance of vaccine rollout. However, we anticipate the Eurozone block would follow catch up the speed with the US. Based on this, we expect EUR would outperform the USD.

  • The UST 10yr yield closed Monday at 1.58%, neutral to Friday.
  • German 10-year Bund was up at -0.25%, slightly below last week’s high.

Please have a look at other EZ bond yields from Reuters graphics: http://fingfx.thomsonreuters.com/gfx/rngs/WORLD-ECONOMY/010031622MG/index.html

As we noted last week, we are looking beyond the current quarter, and hence we expect EA would lead the way with the reopening of Europe’s economy and accelerating vaccine rollout in Europe. It is premature to talk about those things in April, but that’s how the FX market prices. We expect bunds likely to outperform in Q3 and Q4 2021, say -0.17% in the German 10-year Bund.

Last week’s EZ data points from IHS Markit signals return to growth. Manufacturing expands record high since 1997; the catch is the service sector’s return to growth since August 2020. This suggests EZ’s return to growth.

The EUR lifted last Friday on the back of April’s better-than-expected PMI figures. Besides, sentiment among German manufactures hit slightly led by the German services sector.

“In the service sector, the business climate indicator fell somewhat following a steep rise in the previous month,” Ifo reported.

  • Flash Eurozone Services PMI Activity Index printed at 50.3 vs. 49.6 in March- an 8-month high.
  • Flash Eurozone Manufacturing PMI at 63.3 vs. 62.5 in March. A record high (since June 1997), as per IHS Markit.
  • April Ifo institute confirmed that its business climate index had improved slightly to 96.8 from 96.6 in March.

Looking ahead, we will get German prelim GDP q/q on Friday, not a price mover. Focus remains on the Fed Chair Powell’s message. Like last week we focus on the clues of the withdrawal of monetary easing. We are expecting a weaker US post-FOMC meeting this Thursday. Monday shifting to riskier assets is visible as per the latest FX positioning data. 

EUR VIEW:

In April, the common currency is the second-best performing currency among the G10 block, with nearly 3% gains next to the Kiwi dollar of 3.30% against the dollar. This week’s (Thursday) FOMC meeting will be the driver to the dollar and G10 currencies.

Since April 1995, four times the EUR recorded more than 3% gains. Historical April performance data suggest May would print further gains between 0.60%-2.00%.

EUR bulls are approaching the Fed meeting (Thursday) at an overbought RSI level at 64. If the Fed fails to deliver a dovish tone, we will go back to 1.1940 and 1.1830 levels.

Current resistance is located at 1.2115 early march high, equitant to 61.8 fibs of Q1 2021. A decisive breakout above would allow the price to stretch its arms towards 1.2200 and 1.2240. From the current price, the risk rewards are not productive. So, we look elsewhere to trade. i.e EURCHF and EURGBP.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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