Over the weekend, there was an important key-note speech from ECB President Draghi which also had a substantive market impact. He stated that the Euro was an increasing focus for the central bank with the strengthening of the currency requiring further policy stimulus given the impact on inflation and inflation expectations. Although the bank chief stated that the exchange rate is not a policy target, the remarks did mark a significant scaling up of warnings over the situation and verbal intervention against the Euro.
French central bank Governor Noyer also stated that the Euro was a serious pre-occupation and there has been a clear step change within the central bank. Inevitably, the comments will continue to be watched very closely over the next few days and weeks with potential Euro buyers much more cautious given the risk of official-led setbacks.
EUR/USD gapped sharply lower below 1.3850 at the Asian open on Monday before edging higher with no major follow-through selling with support on any approach to 1.3820. The pair attempted to move higher while being unable to move above 1.3870 and also unable to close the gap which caused further technical uncertainty.
There were significant stresses surrounding the situation in Ukraine over the weekend with fears that pro-Russian protesters would clash with the military in Eastern Ukraine. A deadline for protesters to leave disputed facilities passed without immediate response.
The potential positive yen impact from defensive considerations was offset by reports that Prime Minister Abe would meet with Bank of Japan Kuroda, raising speculation that there would be further pressure for monetary easing and USD/JPY was able to find further support below 101.50.
The UK Rightmove house-price index registered a 7.3% increase in the year to April, maintaining underlying concerns surrounding potential overheating and GBP/USD held above 1.67 early in the European session. The CFTC data indicated a more exposed Sterling long position which limited any recovery attempts as sentiment stayed cautious with renewed selling into US trading.
EUR/USD maintained a soft tone during the European session and dipped to lows just below the 1.3820 level before finding some support. The latest headline US retail sales report stronger than expected at 1.1% with a core reading at 0.7% which bolstered optimism surrounding the US outlook. In response, EUR/USD dipped immediately below 1.3820 as USD/JPY probed resistance around 102.00.