EUR/USD looks offered but holds on above 1.0700, focus on Lagarde

EUR/USD extends the corrective downside near 1.0700.

The greenback regains poise amidst higher yields.

ECB’s Lagarde, US ISM Manufacturing next of note in the docket.

The offered bias remains well and sound around the European currency and puts EUR/USD under pressure near the 1.0700 mark on Wednesday.

EUR/USD focuses on Lagarde

EUR/USD sheds ground for the second straight session, as the recovery in the greenback appears to have picked up extra pace on Wednesday.

Indeed, the downtick in the pair comes amidst further rebound in US yields along the curve, while the German 10y Bund yields reached new 3-week tops past 1.15%.

No reaction around the euro after ECB’s Holzmann favoured once again hiking rates by 50 bps against the current backdrop of elevated inflation figures.

In the calendar, final figures showed the German Manufacturing PMI improve a tad to 54.8 in May and tick lower to 54.6 when it comes to the broader Euroland. Still on the latter, the Unemployment Rate remained at 6.8% in April. Later in the session, Chairwoman Lagarde will speak at a BIS event.

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European Stocks Lower; Russian Gas Move, Bank Earnings in Focus

European stock markets traded largely lower Wednesday, as investors digested ramped up geopolitical tensions, a troubled global growth outlook as well as mixed quarterly corporate earnings.

By 4:05 AM ET (0805 GMT), the DAX in Germany traded 0.3% lower, the CAC 40 in France fell 0.1%, while the U.K.’s FTSE 100 climbed 0.2%.

Tensions over the Russia-Ukraine conflict were heightened Wednesday after Gazprom, Russia's state-owned energy giant, confirmed that it has stopped supplies to Poland and Bulgaria. 

It's the first time that Russia has interrupted supplies to EU members in over 40 years of shipping natural gas, caused crude prices to rise and increased concerns about Europe’s energy security.

Russia is demanding payments for its gas in rubles as sanctions over its invasion of Ukraine bite, something that most western countries are not prepared to comply with as that could undermine the sanctions.

By 4:05 AM ET, U.S. crude futures traded 0.2% higher at $101.86 a barrel, while the Brent contract rose 0.2% to $104.84. Both benchmarks gained around 3% on Tuesday.

European equity indices have also been pressured by worries that China’s insistence on stringent COVID restrictions will harm domestic and global growth as well as the hawkish pivot from the Federal Reserve potentially slowing growth at the world’s largest economy.

These factors resulted in consumer confidence in the euro area’s two biggest economies falling more than anticipated. In Germany, data dropped to an all-time low, while French figures declined to the lowest since 2018.

It’s a big day for earnings in Europe, with the banking sector once more to the fore.

Deutsche Bank (ETR:DBKGn) stock slumped 5.6% after the German lender warned that the Russia-Ukraine conflict could hurt full-year results, saying its funds set aside for credit losses are expected to increase "significantly" this year.

Credit Suisse (SIX:CSGN) stock fell 1.6% after the Swiss bank posted a first-quarter loss along with another set of top management departures. 

By contrast, Lloyds (LON:LLOY) stock rose 2.4% after the U.K. lender lifted its full-year outlook with demand for mortgages holding up even as it warned of the dangers to the British economy from higher inflation. 

Elsewhere, GlaxoSmithKline (NYSE:GSK) stock rose 0.7% after the pharmaceuticals giant beat expectations for its first-quarter results, helped by buoyant sales of its COVID-19 treatment.

Mercedes Benz Group (OTC:DDAIF) stock rose 1.4% after the carmaker confirmed its guidance for the full-year with high prices making up for supply chain troubles, Telia (ST:TELIA) stock advanced 1.1% after the Swedish telecoms operator posted better-than-expected quarterly earnings, and DSV (CSE:DSV) stock climbed 2.7% after the Danish transport company raised its 2022 outlook.

There were also significant earnings after Tuesday’s close on Wall Street, with Google parent Alphabet (NASDAQ:GOOGL) reporting first-quarter revenue below expectations, while software giant Microsoft (NASDAQ:MSFT) forecast double-digit revenue growth for its next fiscal year.

There are more significant U.S. earnings releases Wednesday from companies such as Meta Platforms (NASDAQ:FB), T-Mobile (NASDAQ:TMUS), and Boeing (NYSE:BA).

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 Euro gains respite from Macron's French election lead

The euro looked set to snap a seven-day losing streak versus the dollar on Monday, as the single currency rallied after French leader Emmanuel Macron beat far right challenger Marine Le Pen in the country's first round of presidential voting.

Investor concerns about the future direction of the euro zone's second-biggest economy have weighed on the euro and added to worries over the economic costs of war in Ukraine.

Meanwhile, the dollar has been pushed higher by rising U.S. yields and expectations the Federal Reserve will act quickly to stem inflation. One of the big fallers has been the Japanese yen, which fell to a fresh seven-year low versus the dollar.

Macron will face Le Pen in what promises to be a tightly fought French presidential election runoff on April 24.

Nonetheless, Macron's lead in the first round provided some respite for the euro - lifting it by as much as three quarters of a percent in Asian trading hours to $1.0955. It was last up 0.3% at $1.09080.

Currency analysts said the contest remained on a knife-edge with negative implications for the euro.

"The narrower than expected victory for President Macron will keep alive fears that there is an outside chance that Le Pen can become president," analysts at MUFG said in a note.

"The first-round results and the opinion polls pointing towards a close result in the second round will remain a modest weight on the euro in the coming weeks."

The dollar index - which tracks the greenback against a basket of six peers - was broadly flat on the day, just shy of the 100 mark hit last week for the first time in nearly two years.

As the dollar has gained ground, investors have seen little reason to exit bets against the yen while the Bank of Japan holds yields near zero.

The yen fell as much as 1% on the day to 125.55 yen per dollar, its lowest level since 2015.

"There's nothing there to frighten people out of dollar/yen positions," said National Australia Bank (OTC:NABZY)'s head of foreign exchange Ray Attrill. "So onwards and upwards for dollar/yen."

Sterling was broadly flat versus the dollar at $1.30380.

The Russian rouble weakened in jittery trade, reversing some of the previous week's gains, after the central bank decided to relax temporary capital control measures.

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 Dollar Edges Lower Ahead of Fed Minutes; Aussie Dollar Soars

The U.S. dollar traded in a tight range Tuesday, while the euro edged lower on talk of additional sanctions on Russia and the Australian dollar received a boost from a hawkish central bank.

At 3:00 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 98.955, just below the one-week high of 99.083 reached overnight. 

The dollar has been drifting this week so far as investors await the arrival of the minutes from last month’s Federal Reserve policy meeting, due on Wednesday. 

Expectations are building that the central bank will move more aggressively at its meeting in May, especially after a jobs report that showed nonfarm payrolls increasing by 431,000 jobs last month while the unemployment rate fell to a new two-year low of 3.6%.

Ahead of the Fed minutes, Tuesday sees the release of ISM’s non-manufacturing PMI data for March, at 10:00 AM EST (1400 GMT), which is expected to show increased momentum in March, while speeches from Fed policymakers Neel Kashkari, Lael Brainard and John Williams will also be closely studied.

Elsewhere, AUD/USD rose 0.9% to 0.7607, jumping to a nine-month high, after the Reserve Bank of Australia left its benchmark interest rate unchanged at 0.1% at its latest policy setting meeting, but indicated that rate hikes were coming.

Australia’s central bank dropped its pledge to be "patient" on tightening policy in its statement following the decision, a phrase that has featured in every post-meeting release since November 2021, suggesting that it is going to hike sometime soon.

EUR/USD was largely unchanged at 1.0972, hovering above a one-week low, on talk of fresh sanctions on Moscow following alleged atrocities on civilians by Russian forces in the Ukrainian town of Bucha.

German Chancellor Olaf Scholz said that Putin and his supporters would "feel the consequences" of events in Bucha, while Biden's national security advisor, Jake Sullivan, stated that new U.S. sanctions against Moscow would be announced this week.

“It still seems that the EU is some way from weaning itself off Russian oil,” said analysts at ING, in a note. “Presumably, any moves from the EU toward a Russian oil embargo would see crude prices spike higher again and the euro come under pressure.”

USD/JPY fell 0.2% to 122.58, dropping back further from the multi-year high of 125.10 reached in late March after Bank of Japan Governor Haruhiko Kuroda stated that the recent pace of appreciation was "somewhat rapid," and policymakers are watching moves "carefully."

GBP/USD rose 0.1% to 1.3133, USD/CNY was flat at 6.3638, while USD/TRY rose 0.1% to 14.7092 the day after Turkey’s inflation jumped to a fresh 20-year high in March, with consumer prices rising an annual 61.1% through last month.

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GBP/USD eyes break below 1.3100 and towards key support amid buoyant buck

• GBP/USD is trading with a downside bias as the euro underperforms and 21DMA continues to act as a ceiling.
• A break lower to test last week’s 1.3050 lows looks on the cards, with bears also eyeing 1.3000 annual lows.
• Following hawkish Fed commentary over the weekend and ahead of possibly more this week, USD risks are tilted higher.

In a relatively tame start to the week for currency markets, GBP/USD is trading with a downside bias and is currently threatening a downside break of the 1.3100 level. Sterling is likely weighed by underperformance in its cross-English Channel peer the euro, which is underperforming ahead of the resumption of Russo-Ukraine peace talks later in the session and amid further chatter about a possible EU embargo on Russian energy imports. Commentary from BoE policymakers on Monday did not stray into the territory of monetary policy and thus hasn’t impacted cable, which probed last Friday’s lows in the 1.3080s earlier in the session and is eyeing a break lower towards last week’s lows around 1.3050.

“Despite much focus on the heaviest cost of living rise since British records began (1950s), the market still prices the BoE Bank Rate at 2.20% at the December meeting later this year,” noted analysts at ING. “That pricing of the BoE cycle is likely keeping GBP relatively well bid, although we do think the risks are growing of Cable breaking down to the $1.25/28 area over coming months,” they warn. Amid a light UK data schedule this week, the risks posed to GBP from fears of a weakening UK economy likely won’t be the major market focus.

Rather, the outlook for Fed policy is likely to be a much more important topic. Already over the weekend, there has been fresh hawkish commentary. Fed’s John Williams warned that balance sheet reduction could start as soon as May and Fed’s Mary Daly said the case for a 50 bps rate hike in May has grown. Various Fed policymakers will be making public appearances and talking policy throughout the week and the minutes of the Fed’s most recent, hawkish meeting will be published on Wednesday.

Risks seem tilted towards the upside for the US dollar amid the risk of further hawkish Fed vibes. GBP/USD’s 21-Day Moving Average in the 1.3120s, which has been providing solid resistance over the past few weeks, looks likely to continue acting as a ceiling for the time being.

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