Dólar permanece na defensiva

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Global core bonds set new recovery highs
In a more sideways oriented trading session, bonds were first supported by the concern surrounding the health of Dexia after the trade in their share was suspended and later by weaker US eco data. However, most gains were erased after setting intraday highs.Dollar remains in the defensive
As is already the case for quite some time, there is no standout driver for EUR/USD trading. On Friday, overall dollar weakness prevailed even as Greece remained in the news headlines. Today, currency trading will develop in thin market conditions. Later this week, it will be interesting to see which way the balance of weaknesses (between the dollar and the euro) will tilt.US Equities rose for a third consecutive session on Friday led by gains in materials and energy shares. This morning, Asian shares hover between gains and losses.EU and IMF officials are expected to deliver their verdict this week on Greece's faltering drive to bring it budget deficit under control.According to the FT, the new deal for Greece would lead to unprecedented outside intervention in the Greek economy including international involvement in tax collection and privatization of state assets, in exchange for new bail-out loans.Ireland may have to ask for another loan from the European Union and IMF because it will struggle to return to debt markets to raise funds next year, a government minister said in The Sunday Times.Greece's Prime Minister failed to convince opposition leaders on Friday to support tougher austerity measures to free up EU/IMF aid needed to avert a dent default.Seventy percent of Japanese voters want to get rid of Prime Minister Naoto Kan, a survey showed, marking more bad news for the unpopular Prime Minister, likely to face a no-confidence vote as early as this week.G8 leaders all back French Finance Minister Christine Lagarde's bid to run the IMF, France's Foreign Minister Juppe said yesterday. The main obstacle in Lagarde's way is the possibility of an inquiry into her role in a 2008 legal settlement involving paying €285 million to businessmen Bernard Tapie, an ally of the President Sarkozy.Today, the eco calendar contains the Belgian and Spanish CPI inflation data. US and UK markets are closed today.

On Friday, there was still no standout driver for EUR/USD trading. So, price action in the cross rate was still driven by heterogeneous, often conflicting news headlines and rumours.

The euro reached a recovery high at 1.4279 in Asia. The rebound was both driven by an improvement in overall sentiment on risk but it also mirrored underlying dollar weakness as the US currency was hit by poor US data and declining yields of late. European equities took a positive start too and EUR/USD held close to the highs early in European trading. Later in the morning session, the calm was disturbed. Trading in the shares of Bank Dexia was suspended and this caused a quite a lot of rumours in the market. In addition, the EU confidence indicators came out weaker than expected. European equities temporary returned part of the earlier gains and EUR/USD reached a reaction low in the 1.4185 area. However, the uncertainty on Dexia was removed after the group published a statement. So, EUR/USD turned north of the 1.42 barrier. The US eco data (personal income and spending) were in line with expectations. Investors were apparently happy that they didn't contain any negative surprise. The riskrally continued. The US mid morning data (Michigan consumer confidence and pending home sales) were mixed. Later in the session, the risk rally ran into resistance and the rebound in EUR/USD slowed. News headlines that Greek leaders had failed to reach a consensus probably played a minor role. Nevertheless, EUR/USD closed the session near the intraday highs at 1.4319, compared to 1.4145 on Thursday.

Today, markets in the UK and in the US are closed. So, trading will develop in very thin market conditions. In addition, the calendar in Europe is far from inspiring, too. The Italian bond auction is probably the most interest feature to keep an eye on. In this context, all kinds of headlines on Greece will probably get ample coverage on the financial newswires. There are rumours and press articles that Greece had missed the fiscal targets that are required to get the next tranche of the IMF/EU package. However, the EU and the IMF denied the rumours. At the same time, all kinds of parties involved in the Greek debt debate are again giving their opinion on the scenario of a Greek debt restructuring.

Last week, the negative headlines on Greece and on the slowdown the global economy had no negative impact on EUR/USD as it was counterbalanced by overall dollar weakness. Markets are inclined to think that the Fed will continue to keep its policy rate at extremely low levels in case US growth would slow further. The negative interest rate differential continues to weigh on the US currency. Today, the focus will probably still be on Greece as there won't be much other news. Later this week, the eco data might again come to the forefront, even as markets will keep a close eye on the findings of the EU/IMF mission in Greece. With respect to the eco data, it will be interesting to see the market reaction in case the US eco data would continue to point to a further slowdown in growth in the US. Will this weigh on the dollar or will it hit the euro due to a deterioration in overall sentiment on risk? It was and still is no easy choice for EUR/USD traders. They have to choose between two weaknesses. Last week, dollar weakness prevailed. However, in a somewhat longer term perspective, we doubt that the euro will continue to get the benefit of the doubt, if sentiment on risk would deteriorate in a profound way. At the same time, it is also not evident to predict the market reaction in case of stronger than expected US data. With US yields at extremely low levels, the dollar might receive some interest rate support in case of such a scenario. Several other options, tactics might be considered, but for now we assume that there is somewhat of an asymmetrical risk to see EUR/USD lower at the end of this week. Nevertheless, with quite a lot of conflicting drivers to guide the price action we continue to keep a close look at the technical charts.

We had a LT bullish strategy for the EUR/USD cross rate based on the different policy approach between the ECB and the Fed. However, extreme euro long positioning made the cross rate vulnerable to a correction. The recent correction started as the ECB didn't signal a rate hike in June as markets expected. Renewed uncertainty on Greece and the commodity correction reinforced the repositioning in EUR/USD, too.

Over the previous two weeks, the pair showed some tentative signs of bottoming out off from the intermediate low at 1.4048, even as the rebound was far from spectacular and as the pair reached temporary a new correction low below 1.40. We changed our short-term bias for EUR/USD to negative. The 1.4346/1.4442 resistance is our point of reference short-term. A rebound beyond 1.4346/1.4442 would call of the downward alert in this cross rate. We prefer a sell-on upticks strategy as long as this resistance holds.

EUR/USD: a balance of weaknesses

Support comes in at 1.4218 (Reaction low hourly), at 1.4188/84 (MTMA/Reaction low hourly +STMA), at 1.4123 (Reaction low) and at 1.4067/64 (Reaction low hourly).

Resistance stands at 1.4334/39 (Reaction high/ 38% retracement), at 1.4345/54 (20 May high/Broken 50 d MA) and at 1.4442 (Reaction high).

The pair is in neutral territory.

On Friday, broad-based dollar weakness continued to weigh on the USD/JPY cross rate, too. The pair reached an interim low 80.84 during the morning session in Europe. Fitch cut the outlook on Japan to negative from stable. The yen lost a few ticks after this rating action. However, the impact on currency trading was limited and temporary. Later in the session, the focus returned to the US eco data. US data were mixed, but the poor pending home sales were seen enough a reason to sell the dollar again. USD/JPY reached an intraday low at 80.70 and closed the session at 80.80 compared to 81.29 on Thursday.

This morning, Asian equities are mixed, mostly marginally lower. With US markets closed today, trading in USD/JPY will probably develop in very thin market conditions.

Over the previous month, USD/JPY developed an almost uninterrupted decline off from the early April correction high at 85.53. The move was a correction on the sharp decline of the yen early last month, but also mirrored underlying global dollar weakness. We looked to pick up the USD/JPY cross rate in the 80/81 area. This target area had been reached early this month. So, a tactical USD/JPY long position could be considered. The story on USD/JPY remains ambiguous, but the constructive sentiment on risk has given the pair downside protection of late. Last week, overall dollar weakness also weighed on this cross rate. We maintain a cautious positive bias for this cross rate. Stop-loss protection to defend return action below 80 remains warranted

USD/JPY: overall dollar weakness continues to weigh

Support comes in at 80.70 (Reaction low), at 80.34 (Reaction low), at 8003 (Boll Bottom), and at 79.57 (Reaction low).

Resistance is seen at 81.12 (Daily Boll Midline), 81.37/40 (MTMA/Reaction high hourly), at 81.80 (Breakdown hourly), at 82.21/23 (Reaction high/19 May high) and at 82.74 (Reaction high).

The pair is in moving into oversold territory.

On Friday, EUR/GBP was off from the lows as it joined the rebound of EUR/USD in Asian trade. The pair was seen in the 0.8670/75 area at the start of trading in Europe. Later in the session, EUR/GBP decoupled from EUR/USD. The later remained well supported, at least partly due to overall dollar weakness. In technical trading, EUR/GBP basically held a sideways trading pattern for the remainder of the session. There were no important eco data on the calendar in the UK. The pair closed the session at 0.8673, compared to 0.8623 on Thursday evening.

Overnight, the Hometrack housing survey indicated that UK house prices declined by 0.1% M/M and 3.7% Y/Y as buying interest slipped. The report had no big impact on sterling trading. Today, UK markets are closed. So, trading in EUR/GBP will be driven by global sentiment on the single currency and by technical considerations. Later this week, sterling investors will keep a close eye on the UK PMI's.

We have a LT EUR/GBP bullish view. The ECB's firmness to rein in inflation contrasts with the BoE MPC's attitude of postponing a rate hike despite ongoing skyhigh inflation readings. The EUR-GBP interest rate differential increased accordingly and pushed the pair beyond the 0.90 mark early May.

Early May, we hoped for a (technical) correction in a market that was positioned overly long euro to (re)enter the market at lower levels e.g. in the 0.8715 to 0.8654 area (previous lows). Until the May 5 ECB press conference, these levels looked very far away, but the target was reached in the post-ECB era. So we reinstalled a buy-on-dips approach. A cautious rebound started, but last week the pair dropped again temporary below the 0.8654 support. A sustained drop below this level would signal that the correction of the euro has further to go. So, the red alert in this cross rate is still on. Tight stop-loss protection on EUR/GBP longs remains warranted. In a LT perspective, we think that the downside risks in EUR/GBP are less compared to EUR/USD. Nevertheless, in a day-to-day perspective, the picture in this cross rate remains fragile.

EUR/GBP drops (temporary?) below the key 0.8654 support, but no sustained break yet .

Support comes in at 0.8642 (Reaction low hourly) at 0.8329 (Break-up hourly), at 0.8611 (Reaction low), at 0.8574/66 (62% retracement/Daily Boll Bottom) and at 0.8560 (1st target off 0.8742) and at 0.8534 (10 March low).

Resistance is seen at 0.8692 (Reaction high), at 0.8720 (MTMA), at 0.8752/59 (Reaction high/Breakdown hourly), at 0.8792 (Breakdown daily).

The pair is in oversold conditions.

Another weak sign from the US housing market as pending home sales fell sharply in April, while the consensus was looking for only a small decline. On a monthly basis, pending home sales fell by 11.6% M/M and also the previous figure was downwardly revised (from 5.1% M/M to 3.5% M/M). The details show that sales dropped sharply in the South (-17.2% M/M), Midwest (-10.4% M/M) and West (-8.9% M/M), while they rose slightly in the Northeast (1.7% M/M). As the decline was led by the South, the bad weather surely had an impact. Nevertheless, this outcome provides only further evidence that the US housing market remains depressed. While we were hoping to see a boost from the spring selling season, it looks as if our hopes were too optimistic.

The final figure of May University of Michigan consumer confidence showed an upward revision from the first estimate, which was already stronger than expected. The final figure showed an upward adjustment from 72.4 to 74.3, while no revision was expected. Looking at the details, both the economic conditions (81.9 from 80.2) and economic outlook (69.5 from 67.4) sub-index were upwardly revised. The improvement in consumer sentiment was probably due to the lower oil price as inflation expectations were sharply downwardly adjusted from the preliminary estimate. Nevertheless, the weak data of recent, which suggest that the US recovery is slowing, raise expectations that consumer confidence might weaken again in coming months.

In May, European Commission's economic confidence fell for a third consecutive month. Economic confidence fell from a downwardly revised 106.1 to 105.5, slightly below the consensus estimate (of 105.7). The details show a significant weakening in industrial (3.9 from 5.6) and services (9.2 from 10.4) confidence and also retail (- 2.5 from -1.8) and construction (-24.6 from -24.3) sentiment deteriorated in May. Weakness across several sectors was partly offset by an improvement in consumer confidence (-9.8 from -11.6). The final figure of European Commission's consumer confidence showed however a slight downward revision compared to the first estimate (-9.8 from -9.7). National data illustrate that weakness was broad-based as economic sentiment deteriorated in both core (Germany, France, the Netherlands) and non-core (Greece, Portugal) EMU countries. While the decline was somewhat smaller than in the PMI's, economic confidence fell for a third straight month, which signals an trend reversal and provides further evidence that the recovery in the euro zone is losing steam.

In Germany, CPI inflation unexpectedly fell back in May, according to the first estimate. On a yearly basis, German CPI dropped from 2.7% Y/Y to 2.4% Y/Y, while the consensus was looking for a stabilization. The details of the six states show that prices of food, alcohol and tobacco rose in May, but this was more than offset by lower prices for transportation, household energy, leisure and entertainment and package holidays. The drop in prices was probably only a temporary pull-back after the Easter Holidays while also the decline in the oil price was an important factor in this month's data. Nevertheless, German inflation remains significantly above the ECB's 2%-target, which will most likely remain the case in the coming months

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