Eurodollar returns to 1.24

Aside from the USD recovering some of its sudden losses from Friday evening, the currency markets have been slightly quieter on Monday. After appreciating as high as 1.2576 earlier in the day, the Eurodollar has since slipped back under 1.25. This move was hardly surprising considering that Friday evening’s late rally was solely correlated to investors taking profit on Dollar positions. Unless investors begin to price in the prospect of further stimulus from the European Central Bank (ECB), the Eurodollar looks set to continue consolidating around 1.24 for the next few days. Advances beyond 1.25 are not expected and if the Eurodollar does move to the upside, it will once again be linked to USD profit-taking.

The Prime Minister of the United Kingdom, David Cameron, has made headlines for suggesting that “we’re on the brink of another global recession”. None-the-less, his comments were not the reason why the Cable declined 70 pips this morning. The decline was due to HSBC and Barclays pushing back expectations for a Bank of England (BoE) rate hike to Q1 2016 and Q3 2015 respectively. As long as corporate entities continue to push back expectations for a UK rate rise, the GBPUSD will continue to look bearish. Investor appetite towards the GBP has been limited for a few weeks now and the primary reason behind any upside fluctuations has been USD profit-taking.

Elsewhere, Japan continues to attract headlines following the emergence of reports last week that Japan’s Prime Minister, Shinzo Abe, was considering calling a snap election to postpone a sales tax increase for next year. Early this morning, GDP figures confirmed the world’s third largest economy has entered a recession following drops in consumer expenditure after the sales tax in April. Confirmation of Japan entering a recession led to the USDJPY advancing to 117 for the first time since October 2007. It is being reported that the Japanese Government is set to announce a snap election within the next few days and if this occurs, further JPY weakness is highly likely.

In the meantime, there are signs of investors closing positions on the USDJPY, which has resulted in the pair falling to around 116.250. Investors closing positions on the USDJPY is most likely linked to the fact that any reports regarding a snap election are currently unconfirmed and remain rumours. Although I understand that a snap election would obviously create uncertainty among investors, and thus have bearish implications on the JPY, I also have my reservations regarding whether the reports will be confirmed. The Japanese government remains under high debt with the International Monetary Fund (IMF) recently suggesting that Japan should continue as planned and raise taxes.

Moreover, the impressive Japanese Machine Orders performance last week, reporting an annualised 7% increase, did provide an indication that Japan is finally overcoming the detrimental impacts of the April sales tax. If upcoming Japanese economic releases continue to perform like the Machine Orders release, perhaps there is room to raise the sales tax after all.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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