GBP losing its shine? – May struggle against the EUR near term

London quiet after EUR relief rally tamed, but no major turnaround yet. ECB on Thursday though. GBP losing its shine? – May struggle against the EUR near term. USD also stuttering after modest recovery vs JPY despite yield pick up.

After so much hype over the potential ramifications – for the EUR and EU wide stocks – from the French election result, Monday was a very tame after (certainly through European hours) as the largely anticipated Macron-Le Pen match-off in the second round saw cause for a relief rally.  The Dax hit record highs, while the CAC 40 pushed up to fresh highs not seen since the start of 2008.  The EUR gapped higher across the board as soon as Asian markets were under way, but not too much movement to note after some of the moderation in the relief pullback which saw EUR/USD up through 109.00, but stopping short of 1.0950.  No data to work against in Tuesday’s session, but the focus will soon turn to Thursday’s ECB meeting, where the governing council are widely expected to reiterate their accommodative stance. 

As such, we expect the EUR is a sell on rallies vs the USD, but to throw further confusion into the mix is Friday’s announcement that president Trump is to release fresh plans on tax reforms.  1.0950 has established itself as a strong resistance point, and ahead of the 7 May run off vote in France, many expect this to hold.  The IFO survey in Germany in the meantime has reported an improved business climate, and with current conditions assessment also beating expectations, in contrast to expectations, which may have been hampered by the general tide of unrest across the single currency zone.

Up until last night, the Pound was still enjoying its own relief rally in the wake of the snap election by UK PM May last week.  Whilst the polls are clearly skewed against the opposition led by Jeremy Corbyn, the uncertainty factor has been burdened once again with Brexit talks yet to commence. This will not start until after 8 Jun, but a by-product of Macron’s anticipated victory in France is the prospect of the UK facing a tougher negotiating counterpart. Macron criticised the UK’s decision to leave the EU, so concessions will be hard to come by from the French quarter once talks begin.

1.2750-1.2905 remain the Cable limits for now, but price action Monday suggests the lower end is looking vulnerable again.  We also have to factor in some month end flow in EUR/GBP, and after the cross rate pierced the 0.8500 in early Asia Monday, demand ahead of 0.8450 now seen.  Public sector borrowing stats due Tuesday morning, but is rarely a major mover.

In the US, we have some house price data of note, along with some regional activity indices, including Richmond and Dallas. As we noted above, tax reform talk has been revived, but the market will not buy into any more bullish talk without greater detail, and this can work against the likes of USD/JPY, which has struggled for upside traction despite the pick up in US Treasury yields.  The BoJ later in the week is largely expected to be another non event as the central bank sticks with stimulus for now, but JPY weakness now playing through the crosses, with EUR/JPY and GBP/JPY outperforming in recent sessions.

The CAD has made some modest ground against the JPY having held off key support levels ahead of 80.00 last week.  However, USD/CAD continues to attract buying interest on modest dips, with today’s move towards 1.3400 well contained.  The move ran concurrently with the all-too-brief upturn in WTI, which attempted a return above USD50.00.  As Crude slipped back into the lower USD49.00’s, the CAD rate was back above 1.3450.  Nevertheless, 1.3500+ looks tough to hold onto, with Friday’s CPI induced move well absorbed above this (potentially) pivotal figure level.

Expect little overnight for AUD or NZD as ANZAC day is observed.  Gains vs the USD in both cases lacked conviction today, and we continue to note resistance from 0.7600 and ahead of 0.7100 respectively.