The FX trading environment has become a little slower in Q2 and although trades continue to present, they have a much lower in profit range – just means working a touch harder.
However, it also presents an opportunity as we can now use variable filters with a smoother and more effective output compared to those periods of high volatility– look at Brexit for example and the effect it had on the GBP.
Thus a variable filter I enjoy using is central bank differentials and with central bank speak in full swing policy differential are becoming clearer and more defined, which is why EUR/USD is flashing at me.
First and foremost, I need to address the European GDP read that was well ahead of market expectations. It created a snap back in EUR crosses, and some have even gone as far to say the fears around a European growth decline have been overblown and that Europe will march on. However, April flash PMIs were once again disappointing to say the least. German manufacturing figure missed again – in fact they have missed every month since July 2018. April PMIs also suggested that there might be renewed weakness in Italy and Spain which where drivers of European Q1 GDP.
This is opening the door for the European Central Bank (ECB) to add additional monetary easing most likely in the form of LTRO loans or some other form of European QE. There is also growing though that the Deposit Rate is also being eyed for further cuts – this change would be a direct FX influence as it will continue to make the EUR a carry trade funding source over the short term as it force funds into the system.
Across the Atlantic however the Fed has (as expected) closed down speculation that it was on the verge of cutting rates. The fact Chairman Powell referred to inflation concerns as ‘transient’ rather than ‘persistent’ means the Fed’s dual-mandate of full employment and inflation at 2% has not broken down enough to cause a cut trigger. In fact, the Fed I believe has no intention of cutting rates in the coming 6 months unless some seriously untoward eventuates – EURUSD reaction to this news can been seen here:
(Source Refinitiv)
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Thus the trade:
Target: Expect EUR/USD grind lower over the coming 3 months looking to target $1.10 as the central bank differential develops further.
Entry: at or above $1.12
Stop: $1.13
