An absence of political risk in Europe has rekindled the appetite for the Euro with prices marching to a fresh six-month high, above 1.1200 as of writing. With Emmanuel Macron’s victory in the French election dealing a sharp blow to populism and quelling “Frexit” fears, investors have redirected their attention back towards the improving macro-economics in Europe. An extremely vulnerable Dollar has fueled the upside rally on the EURUSD, and is likely to elevate the currency higher, in the short to medium term. Euro bulls are back in town with a breakout and weekly close above 1.1200 opening a path higher towards 1.1500. Bullish technical traders are likely to exploit the pending correction towards 1.1100 or a decisive breakout above 1.1200 to sending prices to the 1.1500 level.

Trump vs Fed

The Trump jitters are likely to influence the Federal Reserve monetary stance in the longer term rather than short term. With markets heavily pricing in a rate increase in June, the central bank is expected to raise US interest rates to prevent any unexpected market shocks. As expectations start to deteriorate over Trump’s ability to move forward with the proposed pro-growth policies and US economic data follows a negative pattern, the central bank could be forced to re-evaluate its monetary stance this year. If Fed doves decide to make an appearance amid the uncertainty, the Dollar should find itself vulnerable to steeper losses moving forward.

Brexit woes invite BoE doves

The horrible combination of soft economic data and uncertainty over Brexit has turned the Bank of England dovish, with markets not expecting an interest rate increase until 2019. Although inflation is currently at a four-year high, at 2.7%, and consumers are feeling the pinch from slowing wage growth, the central bank may decide to maintain a defensive stance. If inflation peaks just below 3% next year, before falling back to target in 2019, and the Brexit negotiations are smooth, then the BoE may be encouraged to raise rates in 2019. On the other hand, an unfavorable situation where economic data continues to weaken and complications arise from Brexit talks could give way to a rate cut.

Currency spotlight – USDJPY

Dollar weakness has been one of the key drivers behind the USDJPY’s sharp depreciation this month with prices currently trading around 111.20 as of writing. The pair is at risk of depreciating further if bulls fail to secure a daily close back above 111.60. With risk aversion potentially strengthening the Japanese Yen further, bears may be encouraged to exploit the 111.60 resistance level to sending prices lower towards 110.00. From a technical standpoint, a breakdown below 110.50 should open a path towards 110.00.