EUR/USD enjoys a very strong rally: it took advantage of the USD weakness and didn’t retreat when the greenback did make a comeback against other currencies.
Can this continue? The team at BTMU provides three reasons why this is not sustainable:
Here is their view, courtesy of eFXnews:
1- Even if crude oil prices were to advance further the prospect of the ECB ending earlier than expected would surely only be consistent with the US economy performing well. That scenario is perhaps now already more mispriced than the potential for the ECB not to carry through its QE program until September of next year. The federal funds rate as of June of next year is currently priced at 0.74%, implying a little more than just two 0.25-point increases in the federal funds rate covering nine FOMC meetings.
2- From current market pricing better US economic data may quickly highlight the fact that it is US pricing and not euro-zone pricing that is out of whack with fundamentals. What we have noted of late is that market participants appear focused on the rear-view mirror data of what happened in Q1. The much larger than expected trade deficit reported yesterday (including a 20% m/m surge in consumer imports, really? Is that reliable?) makes it likely that the US economy actually contracted in Q1 with a downward revision at the end of the month probable. Regular readers may recall us posing the question a year ago – which was ‘Is the Q1 real GDP contraction reliable when the economy created 579k jobs?’ and we repeat that question today for Q1 real GDP in 2015 when the US economy created 591k jobs. We expect a similar scenario in 2015 to 2014 – that is, a notable pick-up in economic activity as we move through the year.
3- In that context, the more forward looking ISM non-manufacturing report yesterday, which was stronger than expected, is much more important than the trade data signalling GDP may have contracted in Q1. EUR/USD will struggle to advance much further if US data ahead even starts to match expectations.
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