EUR/USD divergence trade is dead – Commerzbank

The June rate step by the Fed has become much less likely, the Bank of Japan (BoJ) is leaving its monetary policy unchanged and the ECB first has to wait and see what its latest announced measures achieve before taking further action, according to Ulrich Leuchtmann, analyst at Commerzbank, USD short positions should profit most from the three major central banks sitting tight for now.

Key quotes

“The day before yesterday, the Fed missed an opportunity to prepare the market for a possible rate hike in June. And as it normally doesn’t like causing surprises, this has to mean that a rate step in June has become significantly less likely. This conclusion is grist to the mill for those betting on a painfully slow pace of rate hikes that no longer delivers any USD-positive signals.”

The ‘divergence trade’ – EUR/USD short positions that had been motivated by the prospect of a more restrictive Fed and a more expansionary ECB – has therefore finally been killed off. Even the ECB has refrained recently from measures to weaken the EUR, with its focus shifting more and more to the credit channel. However, as long as this does not jump-start, not only will the inflationary effect of ECB policy die out, but EUR exchange rates will also remain unimpressed. As it has to be assumed that not all divergence trades are closed, the EUR/USD exchange rate consequently has good chances of climbing further, at least in the short term.
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Oil retreats from 2016 highs but posts 20% monthly gain

Oil futures pulled back from fresh yearly highs during the American session and settled slightly lower on Friday after a survey showed that OPEC production in April reached near-record highs. Nevertheless, WTI recorded a nearly 20% gain for the month.

West Texas Intermediate crude for June delivery fell 11 cents, or 0.2%, to settle at $ 45.92 a barrel on the New York Mercantile Exchange Friday. However, prices posted 19.8% gain in April extending its rally from multi-year lows struck mid-February.
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US stocks fall, DJIA and S&P cling to minor monthly gains

US stocks closed lower on Friday as disappointing economic data, corporate earnings and a setback in oil prices weighed down.

The Dow lost 57.12 points, or 0.32%, to 17,773.64. The S&P 500 dropped 10.50 points, or 0.51%, to 2,065.31. The Nasdaq Composite fell 29.93 points, or 0.62%, to 4,775.36.

However, main indexes clung to minor monthly gains. The Dow gained 0.5% in April, and the S&P rose 0.3%. However, the Nasdaq lost 2% over the month.
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