May Day holidays throughout much of mainland Europe are hurting risk appetite and condemning some major currency pairs to another tight trading range. The 18-member single currency is wallowing in self-pity, a tad shy of the psychological €1.3900 handle. There was a bid tone certainly set by Asian interest in their session, as they went looking for weak stop losses nesting in the in high 80s. However, ever since then, interested parties have been waiting for today's stateside session to commence. Hopefully the release of initial claims and ISM will be capable of sparking some life back into this forex market.
Nevertheless, if that is not the case, then investors from the varying classes should not expect asset prices to stray too far away from current levels at least until the release of tomorrow's "grandfather" of fundamental data - non-farm-payrolls (market consensus +207k, +6.6% UE rate). For the EUR and not a surprise to many, vols are again pushing their lowest levels in seven-years. Even today there are reports of good sized optioned related 1.3890 interests - this should keep the EUR relatively anchored, at least until the ISM print at 10am EDT.
Despite the market's lack of interest, the EUR has continued to strength against the dollar, rising +0.2% to a three week-high, just shy of €1.39. The common currency has been better, supported somewhat by yesterday's eurozone inflation headline print bouncing back from its March lows. This has dampened expectations of further stimulus from Draghi and company being introduced at next week ECB meet. The fixed income traders are pricing in an easing move by the central bank in June.
Sterling remains a currency beast with its own agenda it seems. The release of stronger than expected UK manufacturing data this morning has managed to propel the pound to new heights for this year. April's PMI rose to 57.3 from 55.8 - boosted by an increase in domestic and overseas orders. Of late, stronger UK data continues to be rolled out and this latest sign of strength has pushed cable to extend gains north of the psychological £1.69 handle to £1.6919. If the UK economic releases continue along this vein then Carney at the BoE will surely be the first amongst the major developed countries to tighten monetary policy - another potential positive for the pound.
On the flip side, some speculators at this stage may have gotten too long of GBP. This morning's strong UK manufacturing PMI has only been able to push the pound "modestly" higher from yesterday's closing levels. Sterling has in fact only managed to appreciate +1% since last month's strong jobs growth fueled rate hike speculation mid-last month. "Buy the rumor sell the fact" mentality of specs could see a major correction with any negative surprises. Expect individuals wishing to add to their GBP long positions at such lofty prices to act swiftly to any sterling negative news. According to the techs, they see significant technical resistance at the 100-MMA, £1.6970. The market faces a major psychological hurdle at £1.7000. Do not be surprised to see more investors considering bucking the trend and selling into this rally, looking to maximize the "best bang for their buck."
Despite risk taking trying to remain in vogue, investors are focusing on the distinction between reductions in monetary stimulus (ECB and BoJ) as opposed to a still uncertain tightening cycle that is expected to follow from some of the G7 members (FED and BoE). So far, policy makers who have been implementing QE have succeeded in removing volatility from the market place and across all asset classes (forex, bonds or equities.) More volatility is required to attract more investment opportunities and the only trigger for higher volatility will only occur with there is a change in CB monetary policy. Nevertheless, volatility will likely remain low, and when it finally does rise a gradual change process of central banks will guide it - it should not be a rapid change. Taking CB out of the equation, investors have to rely mostly on geopolitical tensions or an EM slowdown to occur, only then will this lead to a rise in market volatility.
This morning's US weekly initial jobless claims unexpectedly rose, +14k to +344k (nine-week high) vs. expectations of a -10k fall to +319k. This was the third consecutive weekly increase and happens to push the four-week average to +320.1k. Analysts note that the data will do some "damage to the short-term trend but the broader statement of improving labor markets remains the same." With this morning's April ISM manufacturing PMI print coming in close to the market forecast (54.9) investors will mostly have to wait for tomorrow's NFP for market insight.