Forexperts

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- The EUR is falling and the USD is weak

- The Fed pauses. So what?

- Credit concerns rise again

- RBA, ECB and BOE rate decisions

- Key data and events to watch next week

The EUR is falling and the USD is weak

The financial media is abuzz with the Great Dollar Recovery story, but the real news traders need to focus on is the fall in the EUR. The USD is relatively stable at weak levels against most other major currenciesAUD/USD is only 150 pips below recent highs; USD/CAD remains mired in a 1.00-1.03 range; GBP/USD is stuck in a 1.96-2.00 range; and USD/JPY is slightly above the 103-105 range that has dominated for the last several weeks. The real mover over the last two weeks has been the EUR, and its southern cousin Swissy, but it gives the appearance that the USD is strengthening as the USD index has moved higher, since its nearly 80% composed of European currencies. In last weeks report, I highlighted that the EUR/USD was threatening to break lower and suggested several selling levels, which ultimately proved successful, as well as key support levels that were likely to trigger fresh losses. This past week saw those support levels broken and EUR/USD did extend its decline. The downside continues to attract as Eurozone data continues to print weaker (March German retail sales fell -0.1%; April unemployment rate rose from 7.8% to 7.9%; prelim.-April CPI declined MoM; mixed to weaker EC confidence readings). But most importantly, EU officials continue to speak out on the need for the Euro to weaken further.

ECB Pres. Trichet repeated his concerns that Euro strength could jeopardize economic growth. EU finance chief Juncker was more explicit on Friday, noting that the EUR had declined, but that it needed to weaken further still. French PM Fillon, also on Friday, raised the prospect of a coordinated effort to weaken the EUR and strengthen the USD, saying that Europe could not bear the sole brunt of global currency re-balancing. The G7 statement several weeks ago implicitly noted a specific price level that EUR/USD should return to, namely where it was at the time of the last G7 meeting on Feb 9, around 1.4500. While it seems unlikely that EUR/USD will go there in straight line, it is a reasonable multi-week objective to keep in mind. In the meantime, EUR/USD has fallen further and new technical levels to keep an eye on are resistance between 1.5470 (the top of the Ichimoku cloudprices have now fallen inside the cloud) and 1.5550 (the low from the prior week). I look for EUR/USD to continue to move lower while that zone of resistance is holds; a daily close back above suggests corrective potential higher. To the downside, the 1.5330/40 level (a key low since the initial break over 1.50, hit on 3/24) is the likely trigger to fresh losses, with the base of the Ichimoku cloud still at 1.5134 as the next objective. (For those unfamiliar with Ichimoku charts, please see my article on the subject from the March SFO magazine located in our Newsroom, under the About tab on Forex.com.) EUR weakness is also evident on the crosses and I also favor selling strength in EUR/JPY and EUR/AUD in particular.

The Fed pauses. So what?

The ostensible rebound in the USD is partly explained by the Feds signal that additional interest rate cuts may not happen, but the Fed left itself wiggle-room to ease again "as needed depending on economic developments. I would suggest that the US economy remains exceptionally fragile and is likely to take a turn for the worse before the outlook improves, so additional Fed cuts are still a possibility. The problem is, another cut of 25 or 50 bps is unlikely to make a material difference to the US outlook and so it becomes largely academic whether the Fed cuts again. For the time being, though, widening interest rate differentials have ceased to be a USD negative. The data this week gave the glass half full crowd reason to celebrate that the US downturn is likely to stay mild. But the sub-currents of the data remain troubling, and I would specifically note the employment gauges: the sharp increase in weekly jobless claims (not reflected in the April NFP survey period) and continued rise in continuing claims; sharp declines in the employment components of the Chicago PMI (down about 10 points) and the ISM manufacturing (down about 4 points), which reflect future hiring expectations. So despite the better than expected April NFP, forward looking jobs indicators are pointing to greater weakness. Keep an eye on the employment index in next weeks ISM services index.

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