EUR/USD came under strong selling pressure (with reports it was the heaviest turnover of the year) in European trade, pushing through the year’s low at 1.2624 rather easily, although it found some support ahead of the July 2010 high at 1.2545.
The pair made a move back to 1.26 on rumours that Angela Merkel has softened her stance on a euro-wide deposit insurance scheme, but the lack of follow-through suggests that until we hear confirmation of this, the market will treat it as a rumour. The EU summit has been and gone, and while there have been a barrage of headlines, the lack of movement in EUR/USD or any of the risk currencies for that matter suggests we haven’t learnt anything new, and the emphasis has been pushed onto the next European summit on June 28 and 29.
Traders will be keen to hear more in the upcoming German IFO numbers, which are expected to pullback to 109.4 from 109.9. US durable goods and Jobless claims will also be released, and goods numbers here may bring out USD buyers on the back of safe-haven flows. Our preference is to be short EUR/USD, despite the 14-day RSIs suggesting the pair is oversold, and we feel traders could be looking for moves to 1.26 as levels to sell into. A break of the session low of 1.2545 and July low at 1.2523 will see the pair target 1.2150, the late June 2010 low. Keep an eye on the five-, ten- and twenty-day moving averages, while they are all aligned (in that order); heading lower and until the five-day crosses the ten-day, the trend as they say is your friend.
From a fundamental level, the fact that German bunds are at record levels accords the curve with the two-year bund offering a mere five basis points, 24 basis points less than the same duration, US treasury suggests fixed income traders will continue to shift their preference out of bund and into treasuries, which ultimately means buying USDs.