The US dollar turned in a mixed performance last week, as yields stabilized. However, the technical condition still has not turned convincingly in the dollar’s favor against most of the major foreign currencies. On the other hand, our fundamental conviction that the divergence theme remains intact and is the underlying driver continues to inform our constructive outlook.
On the eve of the French presidential election, the euro eased to three-day lows. At $1.07, it retraced 38.2% of its gains since the April 10 low of $1.0570. The 50% retracement is near $1.0675, which roughly corresponds with the highs from April 12, 13, and 17th. The 20-day moving average is near $1.0680 and the 61.8% retracement is by $1.0650. None of the technical indicators point to a high in place, but the rejection of the $1.0780 area on April 20 needs to be overcome to signal another leg higher. While a market friendly result of the French election may lift the euro in a knee-jerk reaction, we suspect the gains will be limited because this is the result that was anticipated, and ahead of the ECB meeting where Draghi is likely to push against ideas that a tapering or a rate hike is warranted. It may take a break of the $1.0570-$1.0600 to signal that a top is in place.
The dollar snapped a two week slide against the yen. The April 14 low near JPY108 has not revisited, but the bounce was capped near JPY109.50. The dollar needs to move back above JPY110 to remove the downside pressure. The technical indicators are somewhat more encouraging. The MACDs are trying to turn higher, and the Slow Stochastics did not confirm a move to JPY108 in the spot market and also seem poised to cross higher.
UK Prime Mnister May’s call to early elections lit a fire under sterling. Sterling was the star performer, gaining nearly 2.2% against the dollar, the most since early November. Sterling had wind to its back before May’s surprise. It has advanced in five of the past six weeks. In the three sessions since the announcement, sterling consolidated in about a cent range ($1.2760-$1.2860). There is little doubt that May will have a stronger majority after the June 8 election. She will likely be in a better negotiating position vis a vis her domestic rivals and EU negotiators. It increases the chances that an agreement will be struck.
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