Daily FX Wrap: Atrocious terror attack in the UK dominates headlines – markets subdued. GBP resilient, but NZD outperforms. USD/JPY remains heavy.

It has been a mixed session through the day, overshadowed by the horrendous terror attack in Manchester in the UK, which claimed 22 lives. Any market response to this – JPY buying a familiar theme – proved short lived, and as such, we are reluctant to pay credence to such reactions under the circumstances.

Focus on the data this morning was on/in Europe, where the PMI releases were broadly supportive of the optimistic outlook on the Euro zone economy, with exception of German services and French manufacturing components falling short of consensus, but remaining comfortably above the expansionary 50.0 mark. German IFO was also strong in the current assessment and expectations, but despite this, we have seen some initial signs that the EUR rally has extended a little too far in the time frame achieved.

We note the 1.1280-1.1300 as a clear resistance zone, which will not necessarily prompt a wholesale turnaround, but with evidence of some profit taking here, a subsequent consolidation period now more likely. It is also worth noting that despite the prospects of the ECB signalling a QE taper later in the year, ECB’s Weidmann comments seemed to imply compliance from the German quarter over the current policy stance.

In tandem with this was a EUR/GBP rate which also looks to have run its course ahead of 0.8700. We are a little more reluctant to call a near term top here, as the Cable bid tone – as strong as it may be – is really struggling above 1.3000. Even so, there seems to be a relentless bid into 1.2900 – as we saw in last week’s sharp hit in the North American session (Thursday) – with the market still gunning for stops above 1.3070.

Given the recent rhetoric, on both sides of the divide, the Brexit negotiations ahead are going to be a tense affair at the very least, so one has to question the stubborn demand at these levels. The lack of pullback makes for a more severe drop if a turnaround in the greenback develops, with USD proponents likely to target their buying selectively. Rate differentials also have to be factored in, but this counterbalanced by trade weighted fair value levels (higher up) in GBP across the board.

For the USD, there is little sign that the pressure will slacken any time soon. After the allegations levelled at president Trump over FBI investigations hit the wires last week, any USD upturn has been pounced upon swiftly, with USD/JPY quashed well ahead of the 112.00 – also in evidence last week in an all-too-brief turnaround in NY. US Treasury yields have seen little if any movement in the meantime, so price action is led by politics alone, but how long before the market focus on the Jun Fed meeting? First, we have to negotiate the minutes from the May meeting Wednesday evening.

Wednesday also carries the BoC meeting, though no press conference this time around so all the focus will be on the statement – which should be relatively brief. Concerns over inflation and business investment are likely to persist, alongside and unchanged decision on rates. OPEC still the more likely driver of CAD trade from here, where market expectations for an extension to the output deal have been heightened by comments from members and nonmembers alike. It has been a hard-fought recovery for the CAD as a result, with life below 1.3500 congested to say the least.

NZD has been creeping higher in the background, with local press reports over the weekend highlighting a positive budget and forecasts on Thursday. From sub 0.6900 we are now venturing towards the upper 0.7000’s, so we sense a large chunk of this acknowledgment is already priced in, and as such, the risks from here may be skewed to the downside – more so, the closer we get to 0.7100. Trade data due out overnight, with the deficit seen widening to a modest degree.

The AUD has suffered as a result, and this amid the backdrop of recovering metals – Copper briefly tipped USD2.60 today. AUD/NZD is back in the mid 1.0600’s due solely to the NZD ‘euphoria’. This does not bode well for a stronger AUD/USD recovery from current levels, which has managed to breach 0.7500, but with a large helping hand from USD softness.

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Dollar Index H4

After the brief pullback in the Dollar price met resistance at the 21 which predicts a lower low. Taking note of price action, the lows have been less shallow especially after the drop after the last touch of the 21. While the 21 predicts a lower low the trend might be slowing down. Of course a lot depends on the meeting minutes tomorrow and GDP and PCE data on Friday. Also keep an eye on Fed speakers later in today's session.

US10Y H4

Price failed to make a higher high off the support at WPP. After a drop at London close today, price has found support at the 55 EMA which predicts a double top. As mentioned on the Dollar Index analysis a lot depends on meeting minutes and upcoming US data. Anything that threatens the chance of a rate hike in June will result in price rising on the US10Y followed by Yen and Gold strength. Besides Bullard no other Fed members sharing any thoughts on recent soft data. Maybe we hear something in this evening's speeches.

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