NEWS / Foreign Exchange

EUR/USD ever higher

• Treasuries hover sideways
• European yields break above key resistance levels
• EUR/USD ever higher
• G7: no high profile statement expected

Yesterday, no real new news again proved to be good news for the euro, as it confirmed the reigning euro bullish sentiment. The ECB as expected held rates unchanged at 3.75% and Mr. Trichet in the press conference confirmed the market expectations for a June rate hike but leaving all possibilities open beyond June. As such, the press conference didn??™t bring any news for the (currency) markets. It clearly reassured euro bulls that growth and interest rate differentials will continue to favour the euro. So the euro extended its up-move, tested the 1.35 level before settling slightly below later on, closing at 1.3480 against the dollar. Earlier, there was no lasting market reaction to the (mixed) US data (higher than expected jobless claims and import prices). Overnight, Asian investors added to the euro gains and EUR/USD is currently trading around the 1.3520 area.

Today, the calendar is again more interesting, as the US trade balance, the PPI and the Michigan consumer confidence are up for release.. In the current environment, the producer prices probably have the most potential to move the markets. After the Fed??™s focus on inflation, one might expect bond but also FX-markets to react negative if prices were to come out above expectations. Indeed, higher inflation in the context of slower growth, placing the Fed in a difficult situation means that Fed rate support is very unlikely. Lower PPI is no good for the dollar either.

Recent price action shows that the euro-momentum remains very strong and US data probably have to be extremely dollar friendly (how?) to change the course of events, something that is unlikely.. Until further notice, we hold on to our longstanding buy EUR/USD on dips strategy. The 1.3665- area (all time highs) ever more comes within striking distance.

The other key event for the currency markets will be today??™s G7 meeting. We elaborated on that in our global overview on the first page.

The G7 meeting is a political event thus almost by definition surprises are not excluded. However, we have the strong impression that from a tactical point of view, none of the parties involved has a strong enough incentive to rock the boat. So, we don??™t expect the yen world to look very different after today. The yen will not be addressed in the statement.

Yesterday, the yen traded sideways against the dollar, but extended its losses against the single currency as the euro was in the limelight. Remarkably, there was some short-term correction in EUR/JPY after Mr. Trichet during the press conference joined the BOJ saying that currencies (including the yen) should mirror fundamentals. However, this reaction was limited, both in time and in amount.

Recently, our bias was not to row against the yen negative trend. We hold on to that view. USD/JPY returning below the 118.50 area in a sustainable way would be a first/ST sign of a loss of momentum; for EUR/JPY the 159.60 (previous reaction high) is the first point of reference on the downside. Overnight, the yen strengthened slightly against the USD. The dollar has lost of its glance and the USD/JPY has been rising steadily against the yen since early March. So ahead of the G-7 the yen is maybe enjoying some breathing space. The yen is under pressure against AUD and NZD, high yielders and this tells the whole story.

The strong euro sentiment also continues to affect EUR/GBP trading. After trying to test the downside on Wednesday, EUR/GBP yesterday even rebounded to test the recent highs in the 0.6825 area, before returning to the 0.6815 area where it closed. . So, as sterling recently failed to gain on rather positive UK eco data, it is quite logic that it was unable to do so in an environment of overall euro strength and a slightly weaker than expected UK trade balance (published yesterday morning). It might sound a bit like position talking, but in this context, the losses of sterling weren??™t that big.

Recently, our bias was that the February/early /March weakness in sterling was somewhat overdone. We still hold on to that view, but have to admit that market sentiment and the technicals are not on our side. The rebound in the seconfd half of March didn??™t carry far and the euro fought back. A sustained break above the 0.6825- area would be first warning signal for our sterling long position. The recent highs at the 0.6865 obviously are the line in the sand. For today, both the EMU and UK calendars are devoid of important releases. Therefore, global themes and US data might affect trading in EUR/GBP.