Talking Points:

- EUR/USD Threatens Former-Support Zone Following French Election; RSI Approaches Overbought.

- Japanese Yen Weakness to Persist as Risk Sentiment Recovers.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.0860

1.0937

1.0821

1

116

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD gapped higher following the first round of the French presidential election, with the exchange rate tagging a fresh 2017-high of 1.0919; the reaction suggests market participants are scaling back their bearish outlook for the euro-dollar as it makes a more meaningful attempt to break out of the bearish trend carried over from the previous year.
  • However, the lack of momentum to hold/close above the Fibonacci overlap around 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion) raises the risk for a near-term pullback as the formers support zone appears to be offering resistance; will keep a close eye on the Relative Strength Index (RSI) as it largely preserves the bullish formation from the end of 2016 and approaches overbought territory, but another failed attempt to break above 70 may undermine the sharp appreciation in the exchange rate.
  • Focus turns to the European Central Bank’s (ECB) April 27 meeting, with President Mario Draghi and Co. widely anticipated to retain the zero-interest rate policy (ZIRP) even as the Governing Council is on course to narrow its asset-purchase to EUR 60B/month; may see the central bank keep the door open to further extend its quantitative easing (QE) program as officials struggle to achieve their one and only mandate for price stability.
  • At the same time, the ECB may increase its efforts to ward off a ‘taper tantrum’ as the central bank warns ‘present inflation was driven mainly by higher energy prices,’ and more of the same from the Governing Council may continue to instill a long-term bearish outlook for EUR/USD amid the deviating paths for monetary policy.
  • Failure to hold above the Fibonacci overlap around 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion) raises the risk for a larger pullback in the euro-dollar exchange rate, with the first downside hurdle coming in around 1.0780 (100% expansion) to 1.0790 (38.2% expansion) followed by 1.0660 (50% expansion) to 1.0680 (78.6% expansion).

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

109.90

110.64

109.82

13

82

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • The Japanese Yen struggles to hold its ground amid the pickup in risk sentiment, with USD/JPY at risk for a larger recovery as global benchmark equity indices stage a near-term rally; may see the dollar-yen exchange rate continue to pare the decline from March as the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion) offers support.
  • However, the broader outlook remains tilted to the downside as price & the RSI preserve the bearish trends carried over from late-2016, and the Bank of Japan’s (BoJ) April policy meeting may have a limited impact on the exchange rate as Governor Haruhiko Kuroda and Co. are widely expected to endorse a wait-and-see approach for monetary policy.
  • Moreover, the Federal Open Market Committee (FOMC) may also stick to the sidelines at its next meeting in May as the U.S. 1Q Gross Domestic Product (GDP) report is expected to show the world’s largest economy growing an annualized 1.0% following the 2.1% expansion during the last three-months of 2016, and a marked slowdown may dampen the appeal of the greenback as it drags on interest-rate expectations; nevertheless, Fed Fund Futures continue to price a greater than 60% probability for a June rate-hike as Chair Janet Yellen and Co. appear to be on course to further normalize monetary policy over the coming months.
  • With that said, rising U.S. yields may keep USD/JPY afloat over the days/weeks ahead, but an imminent shift in Fed policy may derail the bullish outlook for benchmark equity indices as the FOMC starts to discuss the ‘Great Rotation’ and looks to unload its balance sheet later this year or in early 2018; will retain a constructive outlook for global stocks until the Federal Reserve actively winds down its non-standard measures.
  • Despite the gap, USD/JPY may continue to retrace the decline from earlier this year as it climbs back above the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion), with the next area of interest coming in around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) followed by 112.40 (61.8% retracement) to 112.80 (38.2% expansion).

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DailyFX SSI
  • Retail trader data shows 34.8% of traders are net-long EUR/USD with the ratio of traders short to long at 1.88 to 1. The number of traders net-long is 17.8% lower than yesterday and 52.6% lower from last week, while the number of traders net-short is 15.0% higher than yesterday and 59.2% higher from last week.
  • Retail trader data shows 70.8% of traders are net-long with the ratio of traders long to short at 2.42 to 1. In fact, traders have remained net-long since Jan 09 when USDJPY traded near 117.616; price has moved 6.5% lower since then. The number of traders net-long is 19.5% lower than yesterday and 20.2% lower from last week, while the number of traders net-short is 3.8% lower than yesterday and 17.7% lower from last week.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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