Originally published by AxiTrader
Sitting less than 20 points below the US election night high of 1.1299 the euro remains extremely strong right now relative to recent history.
In no small measure that is because of the difference in US and European data flow over recent month's which has seen Europe print relatively strongly and US data collapse below -40 against Europe's +42 based on the Citibank economic surprise index.
But even with this divergent data there is still every chance that the two big central bank meetings at the ECB this week, and the Fed next, could reflect a more positive outlook for the US and a still cautious one for Europe.
Certainly, that seems to be the bet bond traders are placing if the spread between US and German 10 year bonds is any guide.
While the euro has rallied and stayed strong global bonds have been rallying. European rates have been as much a part of that rally since early May as any other market. And it has intensified this week.
So far though it has had no impact on the euro. That's largely because the US 10-year rate itself - as opposed to spreads to other countries - has been the best indicator for the dollar. My sense is this is because of the weak data and the rerating of the outlook for US growth by global forex investors and traders.
But the respective central bank meetings might give traders a catalyst to rethink the current outlook.
While the return to positive growth and data flow in the EU has already been acknowledged by ECB president Mario Draghi he has stressed that inflation is not yet entrenched enough to change currently QE or interest rate settings.
My expectation is that the ECB decision this week will reflect that.
Likewise last night's release of the latest Job Opening, JOLTS, survey highlights the Fed is right to be worried about the US jobs market.
At a record 6 million openings the JOLTS report suggests that it becoming increasingly difficult for US employers to find the workers they need with the skills to do those jobs. What the Fed is worried about - or indeed expects - is that this reality will then drive increased wages over the course of the next year or do.
And as a result inflation will be back, with a vengeance.
So even though non-farm payrolls for May were weaker than expected the Fed may make the case this is an economy hitting constraints. Not a weak economy.
It's one of the reason the June hike is still locked an loaded with a higher than 90% probability according to market prices.
Were the euro not over extended relative to bond spreads, were it not hovering near election night highs, and were Mario Draghi not likely to continue to push a dovish agenda the risks to the euro would be for higher levels.
But here near 1.13 the chance of a pullback is growing.
Looking at the charts it is between here and 1.1450/60 where I'd expect real resistance to surface. That's a wide range and useless from a short term trading point of view in many ways.
But it is worth noting both the November higher near 1.13 and this high which represents the top of a medium term sideways/down channel.
Here's the chart.
