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LONDON, April 24 (Reuters) - The euro stormed into 2018 in rally mode as traders bet that synchronized global growth would force the European Central Bank to accelerate monetary policy normalization, but the ECB's reluctance so far to signal any shift leaves EUR/USD's gains vulnerable to setbacks.
That probably won't change at this week's meeting or, even, at any of the ECB's other gatherings until September as it seeks to cool bullish currency speculation on concerns that a stronger euro will effectively tighten conditions before officials get the chance to adjust policy.
But that doesn't mean those betting on a further euro rise are long and wrong -- just that their timing is off by a few months.
A EUR/USD pullback to correct the huge number of long positions is probable before it resumes the rally in earnest in the autumn.
As they bide their time, some traders might adopt strategies that take advantage of superior U.S. yields, but they could also be willing to establish fresh long positions if the pair retreats towards 1.2000-1.2100.
EUR/USD ranges have narrowed within the 1.2155-1.2556 extremes established since the end of January.
As a result volatility has fallen.
Last week benchmark 1-month EUR/USD vol traded below 6, within touching distance of the lows seen since December 2017 when EUR/USD was around 1.1800.
Such low option vol is a strong indication that traders, who are long 19.2 billion euros, are not going to see a resumption of the trend anytime soon.
But holding onto those long positions will incur a heavy cost if they sit on their hands because without any FX movement they're losing money by the day.
Indeed, higher U.S. rates mean a EUR/USD long costs 28 pips per month, a loss of more than 1% by the September ECB if EUR/USD remains near its current level.
That difference in underlying interest rates also makes EUR/USD an appealing sell-on-strength play for investors during the period ahead of September's ECB meeting.
Low volatility means little movement and so limited FX risk to eat into the carry that can be earned by holding onto dollars over the next few months.
Should long liquidation depress EUR/USD any carry earned will be enhanced by FX movement.
And as all of the EUR 2.3 billion purchased between April 3-17 are now underwater some paring of bullish bets is assured.
That said, the bull trend is strong, with the current consolidation occurring close to the peak of a 19 percent rise, even though traders are holding huge topside bets.
While a correction looks likely, it may not be that deep.
The lengthy period of sideways trading has allowed traders to amply hedge EUR/USD moves in any direction, evidenced by the huge size of option expiries that are reported on an almost daily basis.
Hedging for these options and the bigger influence of barrier defences at 1.2100 and 1.2000 will lend EUR/USD a lot of support, leaving a low probability of a sustained move below the 200-DMA currently at 1.2000.
The cost of interest rates for cash longs established at 1.21 or lower could be more than offset if the pair moves back to the centre of the 1.20-1.26 range later in the summer when hawkish speculation is likely to be rekindled ahead of September's ECB meeting.
A break over 1.2600, which should reach 1.30/1.31 at a minimum, is more likely if the number of EUR/USD longs are significantly pared during any drop toward 1.20-1.21.
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(Editing by Burton Frierson)
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Credit Agricole CIB Research discusses GBP outlook and thinks that the recent downside is only corrective, while sees GBP dips a buy vs EUR (selling EUR/GBP rallies)
"When considering that speculative-investors have been building up sizeable GBP-long positions for most of the last few weeks and as the latest data failed to drive central bank rate expectations higher, recent downside can be regarded as position-squaring and therefore corrective in nature.
However, we remain of the view that the BoE is on track towards tightening monetary policy as soon as May and such prospects should put a floor below the GBP from the current levels.
If anything the currency may be close to buying territory and dips against the likes of the EUR may be bought," CACIB argues.
Chart: Click here 
Chart: Click here 
Rising oil prices should keep U.S. rates on the rise and benefit the USD now that the U.S. is a net exporter, while hurting the JPY due to Japan's heavy dependence on imported fuel.
That dependency surged after the Tohoku quake, tsunami and nuclear disasters.
And with WTI still at a deep discount to Brent, WTI's bullish backwardation at its widest since June 2014 when WTI was trading above 100/bbl, the outlook for U.S. energy producers, unencumbered by production cuts OPEC and other key producers are abiding by, looks quite bright.
Higher energy prices will likely underpin Fed rate hike expectations, even if higher energy costs and rates pose somewhat of a challenge to growth.
But with the jobless rate at generational lows and fiscal policy very stimulative, the U.S. economy should be able to handle those headwinds.
Higher U.S. energy prices may also reduce consumer spending in other sectors, more tied to imports, which would reduce the trade deficit and help the USD.
With the BOJ likely on hold at least into 2019, rising imported inflation will lower real JGB rates and weaken the yen.
Chart: Click here 
Chart: Click here 
Barclays Research discusses the EUR outlook around the ECB meeting on Thursday and expects a cautious tone from President Draghi which could keep the EUR contained for now with room for near-term downside.
"We expect the Governing Council to make no new announcements about normalization or forward guidance changes. The recent softening of data and rising concerns of trade war might lead the GC members to reassess their balance of risk (ahead of the publication of the update of macroeconomic projections in June), compared with the previous meeting, where they referred to near-term upside risk.
Rates markets have re-priced accordingly as a result with the first 10bp depo rate increase in mid-2019 and the depo rate at 0 in Q2 20) but EURUSD has once again lagged the move, introducing some near-term downside.
Ultimately, we expect the pair to range-trade around our forecast of 1.22 and see little impetus for a EUR-led break to the topside," Barclays argues.
Rising U.S. yields, combined with well-behaved stock markets, have boosted USD/JPY, but the winning streak faces a key test soon at 109.65.
That marks a tangle of technical targets and also happens to be the average price expected by Japanese companies this fiscal year, making it an obvious place for exporters to sell.
That pressure, and event risk from the upcoming BOJ announcement and U.S. Q1 GDP on Friday, will make 109.65 tough to surpass before then.
The BOJ will probably leave their forecast for inflation to rise to 2% by 2020 nL3N1RU45J and signal no overt normalization until CPI, last at 0.8% y/y, is much closer to that target.
The 109.65 level is the weekly Kijun, 50% of the November-March 114.73-104.56 drop and the 161.8% Fibo objective off the 104.56-107.15 March 26-28 base.
Prices today pierced barriers and the 100-DMA resistance at 109 but are a bit overbought.
So, some backing and filling is possible soon, particularly if prices either fail to close above 109 or reach 109.65.
But the rally remains well supported by U.S. yields, which have driven 10-year Treasury-JGB spreads, to their widest since 2007.
Chart: Click here 
Chart: Click here 
TD Research discusses the USD outlook and maintains a tactical bullish bias especially EUR and GBP.
"We suspect that a USD-induced rally is likely to run roughshod through the lower-yielding G10 currencies.
This mostly reflects the likes of the EUR, GBP, CHF, though JPY is expected to underperform as well. We flag that our HFFV argues that the European currencies remain the most at risk to a correction. This reflects positioning partly but also valuation where EUR and GBP range between 1-2% overvalued against short-term drivers.
Against a deceleration in growth and a shift in the central bank's tone, the EUR and GBP look like they have the most wiggle room to decline further. That means EURUSD could have a crack at 1.20 while GBPUSD should break the 100dma at 1.3855," TD argues.
BTMU Research discusses EUR/USD outlook and notes that the pair briefly back below the 1.2200-level for the first time since the start of March.
"The pair is currently moving back towards the bottom of the narrow trading range between the 1.2150 and 1.2550 levels that have held over the last three months.
A downside break out would open the door to a potential test of key technical support at the 1.2000-level where the 200-day moving average is currently located. EUR/USD has not tested support from it," BTMU argues.
"In these circumstances, the euro is still likely to remain offered against the US dollar in the near-term," BTMU adds.
Rising U.S. bond yields and a potentially dovish ECB add to headwinds facing EUR/USD and the daily chart is building for another leg down nL1N1S106F, a view which is supported by longer-term charts.
Downside targets on the EUR/USD weekly chart are showing up at 1.2092, September 2017 high, and 1.2075 30-WMA.
and longer-term charts are supporting this view.
A rebound pattern on the weeklies, early March and early April, would be negated by a close below 1.2155, low from March 1.
This would draw further significance by coinciding with a close below the 21-WMA, currently 1.2210.
Fourteen-week bull momentum is fading fast having confirmed a bull bias since late December.
Monthly action is moving sideways below the 200-MMA after failing to maintain upside breaks in January, February and March.
Rejection at the 1.2483 average this month has led to a decent pullback and EUR/USD is once more threatening a close below the monthly Ichimoku cloud top at 1.2226.
Worth noting that the 100-MMA is poised to cross below the 200-MMA, which would give a further bear signal.
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EUR/USD: Neutral (since 05 Mar 18, 1.2335): Focus is at 1.2153 now.
We highlighted yesterday (23 Apr, 1.2280) that the “pressure has shifted to the downside” and expected “further weakness to 1.2212”. However, we did not exactly expect 1.2212 to be taken out within such a short period of time (overnight low of 1.2196). From here, the focus has shifted to last month’s 1.2153 low and based on the vastly improved downward momentum, the odds for a break of this level have increased considerably. A clear break of this level would suggest that EUR is ready for much deeper down-move in the weeks ahead. In the meanwhile, only a break back above 1.2300 (‘key resistance’ was at 1.2355 yesterday) would indicate that a short-term low is in place.
GBP/USD: Neutral (since 07 Mar 18, 1.3895): Further weakness still seems likely.
We highlighted yesterday that a clear break of 1.3965 “would shift the focus to 1.3900”. However, the continuing decline in GBP that quickly took out this support level was not exactly expected (low of 1.3928). The price action for the past several days (GBP closed lower for the fifth consecutive day yesterday) suggests that further weakness still seems likely. From here, a break below 1.3900 would open up the way for a move to 1.3800. At this stage, the odds for a move to last month’s 1.3712 low are not high. On the upside, the ‘key resistance’ is at 1.4040 now (from 1.4130 yesterday) and only a break of this level would indicate that the current weakness has stabilized.
AUD/USD: Neutral (since 22 Mar 18, 0.7770): Expect further weakness to 0.7550.
We expected a lower AUD yesterday (23 Apr, 0.7665) but the pace of which the decline approaches the major 0.7600 level came as a surprise (overnight low of 0.7599). 0.7600 is major support and a break of this level would suggest further weakness towards 0.7550. This support is followed by another major level at 0.7500 (low in December last year). Overall, the decline for the past few days appears to be running too fast but AUD is not showing sign of slowing for now and we have to contend with further weakness to 0.7550. The ‘key resistance’ has moved lower to 0.7690 from 0.7735.
NZD/USD: Neutral (since 05 Feb 18, 0.7280): Further weakness towards 0.7100 seems likely.
We woefully underestimated the weakness in NZD as it not only sliced through the 0.7190 ‘target’ indicated last Friday (20 Apr, 0.7265) but also broke below last month’s 0.7155 low (overnight low of 0.7147). The price action suggests there is no reason to expect a bottom anytime soon and further weakness towards 0.7100 seems likely. A clear break below this level would indicate that NZD is ready for a much deeper down-move in the weeks ahead. In the meanwhile, NZD is expected to stay on the back foot unless it can reclaim 0.7220 (‘key resistance’ previously at 0.7330).
USD/JPY: Neutral (since 21 Feb 18, 107.35): Room for further extension to 109.30.
We highlighted yesterday that there is “scope for USD rebound to extend to 108.60” but the manner and pace of which this level was exceeded came as a surprise (high of 108.75). While it is too early to expect a sustained USD rally, the current short-term strength has room to extend further towards 109.30. A break of this level would indicate that USD is ready for a move to 110.00. All in, we continue to hold a positive USD view unless there is a drop back below the ‘key support’ at 107.80 (level adjusted from 107.00).
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