Positioning will dominate

There is the potential for limited profit taking on long Euro positions ahead of the weekend French presidential election, but narrow yield spreads will limit any dollar recoveries.  

The Euro continue to probe resistance levels above the 1.36 level against the dollar on Thursday and was trading just above this level late in New York despite a temporary retreat to 1.3560. The US currency drifted weaker to 1.3635 in early Europe on Friday before a marginal recovery with sentiment remaining weak.

The Philadelphia Fed manufacturing index was unchanged at 0.2 in April as overall confidence remained subdued. There was, however, a slightly stronger reading for output, prices and employment while there was also increased optimism over the longer-term outlook which suggests an underlying recovery. Overall dollar confidence will still be fragile in the short term.

The ECB has maintained its recent policy stance by stating that it will act in a firm and timely manner. Overall Euro confidence will remain robust in the short term with support from narrowing yield spreads against the dollar, but the currency will remain vulnerable to some reduction in long positions. The first round of the French Presidential election this weekend may also trigger a slight reduction in Euro positioning.