'EURUSD down-trend not over, but will be weaker' - Simon Smith, FxPro

   Simon
   Smith

PROFILE:
• Current Job: Chief Economist for FxPro
• Career: Holds an MSc. in Economics from the University of London and a BSc. from Brunel University. He has held economic and strategy positions with Standard & Poor’s.

View profile at FXStreet

Simon Smith has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. 

Simon has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. He holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

Is USD retracement merely corrective or do you believe EURUSD bearish trend is over? What is your line in the sand for the pair to change bias?

The bearish trend is not over, but we’re seeing a pause and the resumption will be at a more moderate pace than before. The euro was the underperformer on the majors in the month before the Fed statement last week, which caused dollar bulls to re-assess, so given the stretched level of short-positioning on the single currency, then it was more inclined towards a more pronounced correction. Underlying monetary policy trends are still diverging, but the Fed is likely to raise rates later in the year (rather than June) and the QE program in the Eurozone is already reaching its limits in terms of being able to push down short-term interest rates. This is why the subsequent down-trend will be weaker. In terms of levels, the Wed 18th high of 1.1043 remains key. If that goes, then the pause will be more corrective in nature as more EURUSD shorts bail-out.

What about Greece? Do you think an agreement will be reached between the Eurogroup and the Greek government before the end of April?

Greece, Greece, Greece. I’ll be honest, it’s impossible to say anything that has not already been said in relation to Greece. Even Soros says the odds of a ‘Grexit’ are 50:50, which is something I never say, because to me it’s the same as saying I haven’t a clue. No monetary system lasts forever, be it the Gold standard, Bretton Woods, etc., so ultimately I think the same will hold for the single currency. I’m not saying it will break up entirely, but Greece won’t be part of it in the next 5 years. Will they reach agreement by the end of April? I just don’t know!

What is your approach on US GDP? What is your forecast and how it will affect the USD and then, the Fed next outcomes?

We’re set up for a weaker first quarter, probably with a 1% (annualized) handle. We’ve seen a run of data fall to the soft side of expectations. We’ve also seen signs that the stronger dollar is impacting on the trade position of the US. As such, growth for the year as a whole is likely to fall short of the 3% consensus that currently prevails. For the Fed, this is secondary to the inflation expectations picture and what is happening to wages. Both have recovered, but not to levels sufficient for the Fed to be comfortable tightening policy in my opinion, which is why I continue to favour the tail end of the year, vs. mid-year. The dollar will continue to appreciate, but the pace will be more modest. The trend of the past few months has been unprecedented in the era of free-floating exchange rates (early 1970s onwards) so is by far the exception than the norm.

Do you think the GBP/USD will keep its long-term downtrend until UK elections or further? What's your outlook on the Sterling?

Sterling could well be late in waking up to electoral risks, as was the case for the Scottish referendum in September of last year. Trading politics is ever easy in any asset class and it’s even harder when it comes to FX. The prospect of an overall majority for either main party currently looks to be slim, so to a degree markets are waiting to see if there are last minute swings either way which could make the outcome a little more solid. Without that, sterling is unlikely to underperform, but it’s not going to fall out of bed. Look back to the 2010 election and the fact that we saw the first election with no overall control. Sterling was volatile, but it did not see sustained volatility.

Japan upgraded its evaluation of economy in March for the first time in eight months; is it a signal for a pause in the Japan QE and then the Yen strengthening? Levels to watch?

I don’t think the first growth upgrade in eight months is something to get too excited about. But we’re also not at the stage where we are set to see a reversal of yen strength. In recent years, USDJPY has been characterised by periods of strong trends, then periods of relative stability. We’re in one of those periods at the moment. The Bank of Japan is still expanding its balance sheet and that will keep modest downward pressure on the yen. Short-term, need to watch 122.03 (high of last week), but also for move back above the trendline support drawn from October low (weekly) which was broken last week and will be at 125.20 by the end of April.