EUR/USD – neutral bias – (1.3550-1.3850)
For the first time we can remember for a considerable period, the EUR/USD rate broke below the bottom of the weekly range we set last week at 1.3700.
That’s a reflection of two facts – firstly the low volatility in the EUR/USD market and secondly the lack of incidents of downside corrections in EUR/USD this year. Indeed, the correction since last week’s ECB meeting is the sharpest since the ECB last eased its monetary stance in November last year. Technically, this correction is looking more and more significant – the point being that the trendline support from the July 2013 low, the February 2014 low and the low in early April was breached.
The data calendar is pretty light next week but we would highlight the FOMC minutes from the US as being an important event. The minutes from the April 29th-30th meeting included the Board of Governors filing a public meeting notice to discuss “medium-term policy issues”, meaning there might well have been formal discussions on exit strategies that might have included plans to control liquidity as policy is reversed. Still, there is a market disconnect between US rates and fundamentals that suggests forced buying of government bonds that may keep yields capped for now.
While the correction lower in EUR/USD is significant, we are inclined to think the euro will stabilise ahead of the key event the following week – the ECB meeting. As indicated in Topic 1, we do not think the EU elections starting next Thursday will have much influence on financial market direction or volatility.