EUR/USD Ready To Break 1.35?

With the Easter Holidays gone and traders back at their desks, we anticipate lots of trading action this week after a few days of very low volatility. Firstly, let’s revisit last week’s busy calendar including news from the ISM Manufacturing and non Manufacturing as well as Non Farm Payrolls.

All week there was pressure on the dollar, with the greenback losing ground against most currencies due to bad numbers from the ISM data and higher oil prices due to geopolitical risks. As we said in last week’s article, what saved the day for the dollar was the better than expected payroll data, plus the unemployment rates dropping to 4.4% from 4.6%.

However, although the market moved about 40 pips, this was not strong enough to take the EUR/USD below 1.3330, mostly because of the Easter Holidays and the lack of volume in the markets. Holiday Monday was a very slow day for all currency pairs, with the big move coming overnight when EUR/USD printed 1.3445 before consolidating back to 1.34.

This week we see euro bulls being in control with one thing on their minds: to revisit the all time highs of 1.3666; a level that was last reached at the end of 2004. We had the FOMC minutes yesterday which although hawkish, it was not enough to stop the dollar from falling against most of the other currencies. With EUR/JPY at all time highs 160.85 and curry traders back, the only thing that can save the day for the greenback are today’s rate decisions and the accompanying statement from Trichet.

With the ECB’s rate decision just around the corner, market players and analysts expect the rates to be left unchanged. However, will this be the Trichet statement that everyone is waiting for in order to determine the future for the European Central Bank rates? There is a lot of speculation that Trichet might not be as hawkish as expected due to the higher levels of EUR/USD, just below 1.35-levels, which can hurt exports as the euro is too expensive.

We believe that once again ECB will make it hard for us to know what their future plans are and therefore they might try to buy time by being vague and unclear about monetary policy. We are at a point where whatever Trichet says there will be a high level of volatility in the markets. If he is dovish, euro will sell off and therefore distance itself from 1.35, but if he is hawkish then 1.35 will be broken and a revisit to 1.36 could be inevitable.

Coming to the end of this week, a slow one data wise, look for more volatility on Friday with the US Trade Balance being the main event alongside the PPI. If we see more bad data out of US, the greenback really might continue its fall and the FED might decide to change its hawkish stance; at least for now.

So, enjoy the rest of the trading week and remember that many currency pairs like AUD/USD, EUR/CHF, EUR/USD, EUR/JPY are at critical levels, therefore watching them closely is imperative if you are looking for a good level to trade. Also this weekend we have the G7 meeting which we will be monitored closely for any mention of yen weakness and euro strength, plus any more insight in the dispute between China and the slowing of the US economy.