BNP Paribas: Our models are screaming that the pound is overvalued

The pound strengthened against the opinion polls, that show, that Britain will not leave the European Union on the upcoming referendum on June 23rd. The bank analyze the situation, based on their valuation models and data positioning in the currency market of the British pound.

The analysis shows the strengthening of the pound by reducing short positions in the currency.

Short-term model for assessing the fair value of the exchange rate of the bank shows that market interest rates lagging behind the foreign exchange market. According to the assessment in the short term rally in sterling, it makes it look overvalued against the dollar and the euro, given that the fair value of the EUR/USD is at 1.1349, and the fair value of the EUR/GBP is at 0.7909.

Bank analysts believe that the by current situation the movement of the pair GBP/USD could happen in another way, as bond yields  in Britain will start to grow.

The dollar continues to grow after the last statement of Janet Yellen

On Monday, the dollar reached a two-month peak against a basket of major currencies and a 1-month peak against the yen after Federal Reserve Chairman Janet Yellen said on Friday that the expectations of the Fed are recent rise in interest rates if the economy and the labor market continues to improve. The dollar index marked change of +0.5% reaching a level of 95.96 during the European trading session.

Against the background of "quiet trade" and closed British and American markets EUR/USD was trading in the range between 1.1097 and 1.1144, closing at 1.1137.

The yen felt the strongest growth of the dollar, having reached 111.44 yen on markets in Asia. This is the highest level since April 28, ending the day at 111.10 and increased by 69 pips.

GBP/USD ended the first day of the week with a slight increase of 29 pips to close the day at the 1.4638 level.

Gold continued its downward movement in recent days, recording consecutive negative trading session reaching 1199.61 to end the day at the level of 1204.69 dollars for ounce.

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Some suggestions for the next week - my favourite pairs

EUR/USD

Visibly the pair is trying to reach its support at ​​1.1000. It is quite possible, that before going to south, the price would slightly grow: first level to watch for resistance: 1.1170, next - 1.1240. After the pair reached its bottom at 1.1000, it may bounce from strong rebound, in which it would rise above $ 1.1300.

GBP/USD

Upward trend still remains, as pound is under influence of Brexit, which final result is going closer and closer to "Yes". The nearest resistance is at around 1.4800. At the beginning of the week the pair may make correction to its support at 1.4500, so it could renew its upwards movement.

USD/JPY

The pair is at its resistance of 110.50. Most probably we would not start the week with break of this level. But if we do, the next resistance is seen on 111.00.
Immediate support levels: 109.40, 108.50.

Reducing the USD/JPY to 105 yen may cause the Bank of Japan to conduct intervention

Finance Minister of Japan Taro Aso said that the movement of the USD/JPY with five figures for two sessions are considered "one-sided" and that Japan does not intend to devalue the national currency "strong" or "long."
In his view it would be better if the pair stabilizes around 109.00 yen. This probably means that the reduction in the level of 105.00 may provoke intervention and these considerations probably at some point will chill the passions of the bulls in the Japanese currency.
On Tuesday morning the yen tried to rise against the dollar as investors avoided risk in lower expectations for Japanese intervention. The US currency rose to its three weeks peak at 110.59 amid prospects, that the Federal Reserve to raise interest rates in June.

USA noted that the dynamics of the yen is considered row, while Finance Minister Taro Aso continues to insist that the movement of the yen in recent months is "one-sided and speculative."
Aso also said that Japan has no intention to weaken further exchange rate to improve competitiveness.

By SEB forecast GBP/USD at 1.49 by the end of the second quarter

The high volatility of the pound and its decline for this year are associated with increased risk premium that investors demand for the outcome of the referendum in the UK for further membership in the European Union.
If the country decides to leave the union, questions arise about what will replace the membership in this community, as uncertainty for sure would have a negative impact on the British economy.
The latest opinion polls show that Britons still prefer to maintain the status quo, and it seems, that markets like it.
The high risk premium still remains and if Britain stays in the EU, we should expect growth of the pound, say analysts.
When the subject of a referendum in the UK remains in the background, investors will redirect their focus again on the British economy, and in particular the policy of the Bank of England.
The latest data on inflation and wage dynamics, however, showed no signs of price increases, so experts expect an increase in interest rates in the country by next year.

Does Fed bluffing?

From the published protocol of their meeting in April, Fed became clear that we could see a rise in key interest rates in June.
Similar opinion express several regional directors of the Federal Reserve. They predicted that there may be increased to three by the end of the year. There's no need to comment that it surprised market participants. As a result, the chance for raise in June rose from 19.00% to 34.00%.
Economic indicators that support such an increase are unemployment and the inflation rate.
Unemployment in the US is 5.00%, which are levels of practically full employment.
The annual inflation rate was 1.10 percent, as the Fed believe that it can easily reach their desired 2.00%.
Timid seems the growth of GDP, which for the first quarter is 0.50%. This may be a seasonal trend, because a decrease in GDP for the first quarter is observed in recent years. If so chances for promotion are growing. Unfortunately there isn't enough data to know for sure that low levels of GDP for the first quarter are seasonal.
It's easy to assume that the Fed will comply with the political situation in the country. The aim of course will have as much as possible less impact on the upcoming elections. Primaries continue until June 14, when the last voting will be Democrates in Washington, DC. The Fed meeting will be held on June 14 to 15. So the institution will be able to announce any increase on 15.06, but it will be too fast after the primaries.

Whether Fed bluffs - given the clear and simple communication style that J. Yellen have imposed - probably not.

The Australian dollar fell after Glenn Stevens opened the door for another reduction in interest rates

The Australian dollar is back below 72 cents after market participants saw the recommendation of the Governor of the Bank of Australia Glenn Stevens to guide inflation to 2-3% as confirmation that Bank of Australia will again cut interest rates because of inflation.
In remarks Stevens said the RBA was "very committed to achieve the goal of inflation through monetary policy."
The medium-term inflation target is 2-3%, it is not firm and does not require a response from the bank of Australia and traders act as if the door to a further reduction in interest rates is still wide open.
Stevens also said that the Australian dollar does what is expected to do and act as a "shock absorber" for the economy.
So Stevens would be pleased if the Australian dollar goes back below 72 cents, as many traders now expect it to fall to its lowest levels for the year - 0.6850. This will provide a significant boost to overall economic growth, as Stevens said that if it is stronger, that would be better.
He also added that demand for housing slows.
From his remarks analysts concluded that another reduction in interest rates is on the way.
The dollar found support in its recent lows and now all eyes are on whether 0.7170 will resist or level will be breached.

Why some of the biggest stars want Britain in the EU

Benedict Cumberbatch, Keira Knightley, Chiuetel Edzhiofor, Helena Bonham Carter and Vivienne Westwood are the names of just some of the 250 celebrities from the world of art who signed an open letter calling on their compatriots to vote for staying in the European Union.
The letter was published in the newspaper "The Guardian" (see the article here), as in it some of the most famous artists, musicians, writers warn that their country would become "an outsider shouting from the wings" if on referendum on 23-th of June Britons vote for leaving the EU.
The letter was also signed by director Danny Boyle, poet Carol Ann Duffy, writer Hilary Mantel and John le Carré, as well as actors Bill Nighy, Dominic West, Kristin Scott Thomas and singers Paloma Faith and the group "Hot Chip".
A poll to the British Federation of creative organizations and companies showed that 96 percent of its members want to stay in the EU. Among the reasons are access to the European market and European funds, freedom of movement of talent and influence.

FOMC and oil

Last night, was published the protocol of April meeting of the Federal Open Market Committee of the USA. Despite the soft rhetoric prevailing in the text of the press release, the content of the published protocol significantly increased the likelihood of a rate hike in the United States and caused a wave of selling in high-risk assets. According to the text of the protocol, the voting members of the Fed reported a decline in braking the risks of the global economy and the recovery in oil prices significantly improved the position of the US oil and gas companies, specializing in the extraction of raw materials from shale deposits. If trends continue, it could serve as a basis for a gradual tightening of monetary policy. FED will continue to monitor the situation in the US labor market and the change in retail prices. According to Bloomberg, the probability of a rate raise by 0.25% at the June meeting of the Committee has increased from 13% to 33% in the last day.
Oil prices retreated from their maximum values ​​for the current year against the strengthening of the US dollar and an unexpected increase in US oil stocks. According to the weekly report of the US Department of Energy, crude oil inventories increased by 1.3 mln. barrels while the market was expecting a drop in this indicator at 3 mln. barrels. Also, the additional pressure on oil
contracts had a slowdown in the reduction of production in the US for only 11 thousand barrels over the past week. Following the oil price, quotations of European oil and gas companies are also falling.

Does it worth to buy euros?

Once we have lived through FOMC minutes, it's time to pay attention to Europe. The fact that the whole market strongly believed in the UK and started buying pounds, is good for the euro in log term, but at the current time the dynamics of euro/pound can also put pressure on the EUR/USD. Thus, for short-term traders it makes sense to use every correction to enter the market with short EUR/GBP. But for those who are willing to wait, it makes sense to choose long EUR/USD at current levels. The protocol of the last ECB meeting, which will be released today can support the demand of the euro, if the market will find a confirmation for a longer period of inactivity from the regulator. As it appears, the ECB has made the maximum that could, and now it is waiting for the results. This position will be the main factor supporting the euro over the next few months.

A strong start of the week for the British pound

The British pound was among the big winners of the day after the next survey of the upcoming referendum in Britain showed that 55 percent want the country to remain in the EU, while only 40% are out. Following the news the pound rose to 1.4398 against the dollar and 156.99 against the Japanese yen.
Meanwhile, the Britain's prime minister David Cameron said, that the Brexit would make Isil happy.

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Slight raise for the pound on Tuesday

The pound registered an increase against the dollar on Tuesday. British currency recover some of the lost positions, but the pair still remains far from key levels. If the bulls continue to dominateр the resistance at 1.4670 could be tested soon. Tuesday session started at 1.4405 as the uptrend was leading from the start. Peak of the day was reached at 1.4477 and the finish line was crossed 37 pips below.

Meanwhile, the statistic service in the UK reported, that the total trade deficit in March was lower than the expected 3.8 billion pounds, down from 4.3 billion pounds in February.
The trade deficit in goods shrank more than expected to 11.2 billion pounds in March from a revised 11.4 billion pounds in February. Narrowing of the trade deficit was mainly due to the rise in exports by 400 million pounds to 23.7 billion pounds.
The trade deficit in the first quarter stood at 13.3 billion pounds, its highest level since the first quarter of 2008, the deficit decreased from 12.2 billion pounds generated in the fourth quarter of 2015.

Support: 1.4297; 1.4170;
Resistance: 1.4670; 1.4768.

Societe Generale predicts serious reversal in the currency market for USD/JPY

According to strategists from the bank in USD/JPY there is a hint of an impending correction of the pair. This is confirmed by the monthly and daily indications. They make bank analysts to think that after a year of decline couple prepares for serious turn.

Despite the fact that the long term downtrend remains in effect, in the short term they see upside risks to reach the USD/JPY to 108.70 and then to 110.40-111.00 yen.

Support is currently located at 106-105.20 yen, which may mean that there is potential to reduce to 101-100 yen (lows from 1999/2005, and the peaks of 2009).

The pound fell before the publication of the report on inflation

The pound fell for a fifth day against the dollar, indicating that this is the longest period of decline since January and ahead of the Bank of England this week. Participants in currency trading are focused on the referendum in the country next month, as it relates to Britain's membership of the European Union.
The pound showed weakness against most major currencies before the meeting of the Central Bank on May 12, and also for the publication of reports this week that economists predict will show reduction of industrial production of Great Britain and Northern Ireland.
At the same time none of economists in a Bloomberg survey expected any change in the policy of the Bank of England. Moreover, the authorities are planning to publish quarterly inflation report of the central bank.

Analysts said the weakness of the pound may be a reflection of expectations that data this week will come out weak, and also it is a reaction to the movement of the dollar related to the referendum question.

On June 23 will be held a referendum on membership in the EU. Supporters of the union with the bloc argued that the economic welfare of Britons would suffer outside the EU. On Monday, British Prime Minister David Cameron made a patriotic appeal to the British citizens, once again urged not to vote to leave the EU next month.

A study conducted in Great Britain and Northern Ireland on the issue of EU membership shows that 44% of people want to stay in the bloc, while 46% want to leave the EU.

Does EUR/USD made the peak for the year?

EUR/USD moved briefly above 1.1600 last Tuesday. Bears were activated and the price fell 2 figures. There was an interesting development on Friday, when the price tested the level 1.1464, but failed to overcome it. A Doji figure was formed as price closed just above 1.1400. This level is currently supporting the price. MACD continues to show the sword divergence with price, implying weakness in the bullish group.

Looking at the daily chart is still too early to classify the trend as changed in a bear because there are no more lower highs and lower lows. Support for this scenario will be if the price fail to make a peak above 1.1615 and a lower bottom than the 1.1216 will be formed.

From another perspective, if the price find support and move above 1.1464 we will have to prepare for the test of the last peak.

Seasonality in currency pair indicates that we can expect the formation of a peak in May. Of course this does not necessarily to happen.

By fundamental factors of great importance are the actions or rather inaction of the Fed. Some experts treated the softer tone as a preparation of markets for smoother increases in interest rates.

In this situation of conflicting factors (seasonality against changing fundament) it is better to follow what major market participants think about the situation. The report for the speculative positions shows that large market participants continue to reduce their short positions in euro. For the week before 03/05/2016 net short speculative positions reached minus 23 619 000 contracts.

Currency war is in full swing: G7 countries compete in devaluation

This week brought the currency markets increased volatility. The process of competitive devaluation, with all of this phenomenon excessive jumps in exchange rates is gaining momentum.
Australia's central bank made its move on Tuesday, lowering its interest rate to a record low of 1.75%, which has forced the Australian dollar to fall by more than 2% against the US dollar.
People's Bank of China lowered on Wednesday its rate of the national currency renminbi (the official name of the yuan) to the dollar by 0.59% (378 basis points) to 6.4943 per unit. This is the maximum weakening of the currency of China since August 2015, when the devaluation of the yuan very strongly reflected in global stock markets and led to a drop in China's main stock index by 5-6%.
The euro, meanwhile, rose to eight-month high earlier this week, despite repeated attempts from the part of officials of the European Central Bank to weaken the currency via verbal intervention.
The yen has strengthened this week to 18-month high against the US dollar, which called concern from the head of the Japanese Central Bank, Haruhiko Kuroda, who considers the growth of the national currency "excessive". The strengthening of the Japanese currency in recent years has a negative impact on the performance of many of the country's economy. We remind that at the end of last month, the Bank of Japan abandoned the expansion of monetary stimulus that disappointed investors.

Dollar cuts gains after the release of mixed US statistics

On Wednesday, the dollar reduced growth against other major currencies after data showed that the number of people employed in the non-agricultural sector of the US grew in April less than expected, and the US trade deficit narrowed in March, more than originally anticipated.
USD/JPY fell 0.19% to 106.42, approaching 18-month low of 105.55, marked on Tuesday.
As shown by the data, the number of people employed in non-farm sector grew by 156,000 last month, while expected to grow by 196,000.
In March, the number of employed increased by 194,000, whose figure was revised up from 200,000.
A separate report showed that the US trade deficit narrowed in March to $40.40 billion from $47.00 billion in February, whose figure was revised up from $47.10 billion. Analysts had expected US trade deficit will drop to $41.50 billion.
Dollar recovers from sharp losses obtained after both the Fed left interest rates unchanged last week and indicated that it will stick to a cautious approach to future enhancements.
EUR/USD remained almost unchanged at 1.1499.
USD Index, which tracks the dollar against a basket of six major currencies, remained almost unchanged at 93.03 after a 16-month low of 91.89 the previous session.

Nomura: With the approaching referendum pound will be under pressure

Recently, the pound recovered some losses, including against the Canadian dollar, but currency strategists at Nomura questioned the sustainability of improved dynamics.

They believe that in the near future the referendum in the UK will again be the focus of market participants, as it promises to support the growing pressure on the British currency.

In addition, Nomura recalled that at the end of this week will be announced the results of local elections in Britain, as they don't think the results will please investors.

Also, according to the strategy of the bank is worth to pay attention to the fact that the economic statistics began providing more surprises.

At Nomura believe that it is time to think about the resumption of sales of pounds. They add that so the risks of the policy of the US Federal Reserve will be removed.

BNP Paribas: Fed may tighten currency market

Currency strategists of BNP Paribas noted that the accompanying statement from the FOMC to Fed led to weakening the concerns about external risks, but the commission offset relatively weak growth.

Overall, the text was with mixed character and gave no hope for raising rates by the Fed. Their forecast remained unchanged.

The Bank draws attention to the continuing uncertainty and the fact that while the economy continues to grow, the Fed will be forced to continue tightening policy.

While the situation, according to economists at BNP Paribas, suggests tightening by the central bank, they do not expect interest-rate hike by the Fed before the end of 2017. In BNP Paribas noted that there is potential to further regulate the expectations of investors, who could put pressure on the US currency in the short term.

In addition, for the euro is expected surplus on the current account and in BNP Paribas remain long in the EUR/USD at $1.1290 with a stop at $1.1140 and a target at 1.16.

Deutsche Bank: The situation favors the growth of the yen

Analysts at Deutsche Bank paying attention to the fact that lately everything goes against the yen bears: On April 28, the Bank of Japan did not increase stimulus measures and hardly gave hope to the Ministry of Finance to intervene in the currency market.

The Japanese probably wanted to attract the support of other key central banks in the event of intervention and in this context is quite remarkable that the US Treasury in its semiannual report on foreign exchange market, published on April 29, describes the dynamics of dollar/yen as arranged.

There are risks of increased demand for yen. At Deutsche Bank believe that Japan would be difficult to conduct large-scale intervention to support the dollar/yen in the range of Y105 - Y110.

Deutsche Bank is short in dollar/yen with a target 113.20. The goal remains 105 yen, as the stop is at 116 yen.

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Barclays: When though the Federal Reserve will raise interest rates?

Forex strategists at Barclays note that they are not surprised by the conservative estimates of the internal and external situation given by the Federal Reserve after the April meeting of the institution.

Analysts reserve base forecast, which suggests two increases in interest rates in 2016, the second lifting rates this year is foreseen for December but the question is - when will be the first raise? The baseline Barclays scenario provides June, but experts emphasize that there is a serious risk that this decision be postponed for one of the coming months - July or September.

The complexity of predicting the future course of regulators stems from the uncertainty related to the June referendum on Britain's membership of the European Union.

Comments from Federal Reserve published Wednesday night, allow the institution to approach flexible to the situation. If economic expansion in the US continued at a slower pace, while markets are stressed before the vote in the UK, regulators may delay the tightening of monetary policy in July or September, according to the Barclays Capital.