Sterling, euro and dollar in focus

May 4, 2017 09:22 AM

Asian stocks retreated on Thursday following the mixed cues from the financial market overnight, after the Federal Reserve signaled towards an increase in U.S. interest rates later this year. In Europe, equities were buoyed by corporate earnings and optimism over Emmanuel Macron winning the second round of the French Presidential election. Although the financial market was pressured by the Fed hawks on Wednesday, ​Europe’s upside momentum and solid corporate earnings could help bulls claw back recent losses.

Sterling buoyed by solid Services PMI
Sterling lazily strolled towards 1.2900 during trading on Thursday after UK Services PMI for April unexpectedly rose to a four-month high at 55.8. With the construction, manufacturing and services sector in the UK all displaying signs of resilience against Brexit woes in April, Sterling could be supported in the short term. With uncertainty still a dominant theme with regards to Brexit, investors may start to overlook the improving fundamentals with an increased focus on Brexit negotiations. Hard Brexit fears remain rife with the current dispute over the €100 billion “​Brexit bill” acting as the first major obstacle of many. From a technical standpoint, the British pound/U.S. dollar (GBP/USD) currency pair could appreciate towards 1.3000 if bulls maintain control above 1.2875. In an alternative scenario, repeated weakness below 1.2875 should encourage a decline towards 1.2775.

Dollar revived by Fed hawks
The Greenback popped higher on Wednesday after the Federal Reserve surprised markets by maintaining a hawkish stance, despite the softening outlook for the U.S. Although economic data has been mixed and first quarter growth sluggish at 0.7%, the committee viewed this as transitory, with economic activity expanding at a moderate pace as the stance of monetary policy is adjusted. With expectations heightened over the Federal Reserve raising U.S. rates further, and the CME Group FedWatch tool displaying a 74% probability of a rate hike in June, the Dollar could remain buoyed.

Investors may direct their attention towards the pending U.S. unemployment claims report, which could support the Dollar further if unemployment falls below estimates. From a technical standpoint, although the Fed hawks inspired Dollar bulls on Thursday, the Dollar Index still remains under pressure on the daily charts. A breakout above 99.40 should encourage a further inclined towards 99.50 and 99.80 respectively. On the other hand, repeated weakness under 98.80 should open a path to 98.50.

Euro higher on Macron optimism
The Euro glided higher on Thursday as investors maintained optimism over Emmanuel Macron winning the second round of the French Presidential election this weekend. Bullish investors also took advantage of the positive Services PMI data from Europe to propel the euro/U.S. dollar (EUR/USD) currency pair towards 1.0930 as of writing. With the current polls showing Macron holding a solid 20 point lead over Marine Le Pen, it may be safe to say that a Macron victory has already been “baked into” market pricing. With the French Presidential election saga slowly coming to an end, investors may direct their focus towards the French parliamentary election on June 11 and 18.

Although the EUR/USD is currently trading around five-month highs, the currency does feel undervalued, especially when factoring in how Economic data from Europe continues to exceed expectations. I feel that political risk and uncertainty has dictated the value of the Euro this year with economic fundamentals becoming somewhat secondary. While a Macron victory may send the EUR/USD above 1.1000, an unanticipated Marine Le Pen triumph could expose prices to extreme downside risks, with parity still a possibility.

About the Author

Lukman Otunuga is an FXTM research analyst