EUR USD (1.3230) A warning by New York Fed President William Dudley yesterday that the recent US economic recovery, although gaining speed could just as easily stall, was a reality check for the markets. For those interpreting the recent steepening in the US yield curve as a final proof that the green shoots in the US are here to stay, his statement dented optimism. Despite the recently-improved housing, retail and employment data, Bernanke’s and his colleagues have repeatedly reminded investors that the pace of the recovery is frustratingly slow. This, of course, highlights that all the recent growth data is in a sense ‘artificially stimulated’ by the unprecedented liquidity made available not only by the Fed but by various other central banks around the world. We reckon that with the Operation Twist ending in June, the Fed’s failure to replace it with an alternative option, or even to announce the pursuit of extraordinary measures, would spell substantial psychological damage for the faith the markets have in the Fed, the actual economic impact notwithstanding. In the fourth year of the financial crisis, we thus anticipate the Fed continuing its pro-stimulus strategy. The euro delivered another robust performance yesterday, which has served to improve downside support at 1.3120. As earlier we would endorse a bullish outlook only above the 1.3290/95 level with a potential to 1.3490. Until then the risk of a retreat to 1.2930 remains.
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Deutsche Bank