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Forex: EUR/USD – Will upcoming monetary policy meetings help make the picture clearer?

FXstreet.com (Barcelona) - The EUR/USD traded sharply higher today, closing up 63 pips to finish the day at 1.3092. The upcoming European session will be busy with German Retail Sales, German Unemployment, and Spanish GDP to name a few. The real volatility will most likely pick up later in the week, when both the ECB and Federal Reserve will be holding monetary policy meetings. Finally, we will get Non Farm Payrolls to round out the week in the US.

Many analysts seem to be searching for answers as to the recent strength in the EUR/USD, even after economic data continues to disappoint out of the Eurozone. Last week it was a number of reports which caught market participants attention, with particular focus being on the German PMI/IFO numbers both missing estimates.

According to Kathy Lien of BK Asset Management, “The euro refuses to fall despite growing evidence that the Eurozone economy is in trouble. According to the latest reports, consumer spending and consumer confidence weakened further in the month of April and this time, the deterioration was led by weakness in France and Italy as demand in the Eurozone's second and third largest economies continued to be hit by slower growth and punishing austerity measures.”

She went on to add, “For the European Central Bank, the case for a rate cut this week is building quickly. We have now seen evidence of weaker consumer, business and investor confidence and if the central bank does not act now, they risk allowing the sour mood to slow growth even further.”

Some analysts seem to think the lack of trend in the majority of foreign exchange markets is sending many market participants to the sidelines, which is another reason so much “range bound” activity currently exists.

According to analysts at HSBC, “Lack of prospective movements in FX, with the EUR/USD choppiness a good characterization of such slow pattern established, suggests "a tendency to drift towards a range-trading environment" Consider the recent example of those who sold the EUR on the basis that the ECB appeared more likely to cut interest rates. For a while, the world felt simple. Sell the EUR because rates are going lower – we were back to the good old days. But the EUR did not continue to fall, recovering some ground even though there had not been any marked reappraisal of ECB rate cut expectations. This typifies the problem we are currently facing."

Furthermore they added: "Forecasters, investors and traders are struggling to find a clear explanation for currency moves, and so position sizes become smaller, stops tighter, and profits are taken more quickly. As a result, currencies are drifting into ranges. Even those exchange rates which enjoyed strong trends during Q1 13 such as GBP-USD and USD-JPY have glided into sideways patterns."

Other analysts are turning to the charts, and saying we should have much more clarity in the near future with the economic data due out later this week. According to Marc Chandler, Head of Currency Strategy at BBH, “This week's risk events, including euro area PMIs, the US employment data and the ECB and FOMC meetings, will help strengthen or crystallize price action in the EUR/USD."

He went on to add: "Technically, we think the euro has put in the first leg of the correction of its nearly 10-cent sell off from early February though early April. The first leg up stalled near $1.32, just shy of the 50% retrace objective ($1.3230). We suspect there will be another leg up that can extend the recovery toward $1.3350."

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Yet another slow Asia-Pacific session this Tuesday with Japan back into business after a 3-day weekend, but China still closed on holidays, and USD index barely moving to the upside. Mostly all pairs and crosses inside tight ranges, ahead of a critical week with plenty of central bank meetings, including FED Wednesday and ECB Thursday. EUR7USD below 1.31, AUD/USD below 1.0360, Cable below 1.55, and USD/JPY below 98.
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