On Monday, investors in several markets were looking for a new equilibrium as the first post-Fed reaction was out of the way. European equities, the Bund and EUR/USD showed some intraday volatility, but at the end of the day the changes limited.

Especially for EUR/USD there was not really one dominant story to guide the price action. EUR/USD ceded some ground (profit taking) during the morning session in Europe. There was the usual market chatter on the EMU crisis management. The reluctance of Spain to apply for ESM support was often mentioned as a negative factor for EMU assets. However, wasn’t this reluctance already there last week when the post-Draghi/Fed rally was powering ahead? The same applies for comments from German chancellor Merkel as she continues to oppose a banking license for the ESM. At the same time, she was quite supportive for Draghi’s new approach as she clearly defended the independence of the ECB to take action. EUR/USD drifted half a big figure lower during the morning trade in Europe, but we consider it limited profit taking after last week’s strong rally. Even so, the first ‘setback’ attracted very soon new buying interest. Early in the US, the Empire State manufacturing survey was materially weaker than expected. Usually this is not the most important data series. However, in a context where markets are desperately looking for guidance in a new area, it was enough to kick-start a new USD selling wave. The pair tested Friday’s top and even reached a minor new top at 1.3172, but there were no follow-through gains. Of course, the price action on global currency markets is not only driven by EUR/USD. In this respect, the latest spike was said to be supported strong buying interest in EUR/JPY at that time (anticipation on BOJ stimulus? Yen weakness on tensions between Japan and China?). After the rejected test of the top, EUR/USD entered calmer waters as equities also failed to give a clear direction. At around the close of the European market, ECB’s Coene made some interesting remarks on the ECB strategy going forward (cf the bond part of our report). However, his quotes left no traces on the EUR/USD charts. EUR/USD closed the ‘first day of the week after’ at 1.3117 not that far away from the 1.3130 close on Friday. After the close in Europe, there was also a setback in commodity prices. Some sources mentioned a fat figure. Others saw a link with the tensions between China and Japan. In theory , a decline of commodities could be slightly dollar supportive, for now there was no big reaction. Nevertheless, we keep an eye on this issue as it could at least temporary slow the recent risk rally with consequences for currencies, too.

Overnight, Asian markets are mostly slightly lower, but still no clear trend. For now, this is a market looking for new guidance after last week’s strong trend.
EUR/USD is changing hands in the 1.31 area.

Later today, the calendar is moderately interesting. In Europe, the ZEW survey will be published. This indicator could show a first impact of the recent ECB action. So, the risk might be on the upside of consensus. However, after the recent rally of EUR/USD and other risky assets, it is far from sure that markets will consider it a reason for a new attempt higher in EUR/USD. In the US, the Q2 current account, the TIC data and the NAHB housing market index are scheduled for release. The first one is old news and the second one seldom has a lasting impact on currency trading. The NAHB housing market index might be interesting but market moving potential is limited too. Markets will also keep an eye on the first comments from Fed policy makers after last week’s Fed action.

Today, Dudley and Evans will give their view. Both are on the dovish side of the spectrum. A reaction, if any, most probably won’t be supportive for the dollar. In a global perspective, some consolidation on the recent risk-on gains might be on the cards. For now, the tension in the Middle East and between China and Japan have only a limited impact on global market sentiment. However, they are also no support for sentiment on risk. In EUR/USD no important technical levels are hit. For now, we assume more short-term consolidation, with the risk slightly to the downside.

Technicals and LT view: EUR/USD touched a 2012 low at 1.2043 on July 24.
From there, EUR/USD rebounded after ECB’s Draghi said that the ECB would do whatever is needed to preserve the single currency. Later in August, the soft tone of the August FOMC minutes pushed EUR/USD above the 1.2444 range top, improving the short-term picture. Over the previous two weeks, EUR/USD cleared several important technical resistance levels, including the 1.2824 May 21 top. This swift break above this area clearly improved the technical picture of EUR/USD. Last week’s break above 1.2935 (68% retracement from 1.3487/1.2043) suggests that a full retracement is possible. 1.3284 (01 May top is the next high profile point of reference. The pair is heavily overbought (EUR/USD is rushing away from the averages), but until now this was no big issue for trading. A setback below the 1.2773/1.2748 area (MTMA/previous reaction high) would suggest that the rally is running out of steam and that some consolation might be had hand. A buy-on dips approach is preferred in case of a more pronounced correction is still preferred.

EURUSD

Of late, EUR/USD clearly outperformed cable as the risk rally unfolded.
However, this pattern petered out yesterday. EUR/GBP traders still kept an eye on the EUR/USD headline pair. However, contrary to what was the case for EUR/USD, EUR/GBP didn’t succeed to set a new ST top anymore. Especially at the end of the session, cable was better bid compared to EUR/USD. For now, we didn’t see any obvious news to explain this move. We consider it as technical fall-out from the recent repositioning. Whatever the reason, EUR/GBP closed the session at 0.8071, compared to 0.8094 on Friday. Over the previous days, we several times indicated that we didn’t see the reason for the underperformance of cable in the global dollar sell-off. Is the time ripe for some catching-up move?

Today, the UK CPI will be published. The risk for the headline figure might be on the upside due to higher energy prices. However, will it change the market’s view on the approach of the Fed going forward? We don’t think so.
Nevertheless, after yesterday’s tentative change of the balance between EUR/GBP and cable, we look out whether the figure will be used to push EUR/GBP again a bit lower. If so, this would be telling more on short-term market sentiment rather than on the data or expectations for monetary policy further down the road.

From a technical point of view, EUR/GBP reached a correction low at 0.7755 at the end of July. The commitment of ECB’s Draghi to do whatever is needed to protect the single currency provided also a solid support for EUR/GBP. The run toward the key 0.77 LT support area (October 2010 low) was aborted and the pair reached a corrective top at 0.7963 mid-August. The top of this sideways pattern was broken two weeks ago as EUR/GBP regained the 0.7963 range top.
This break improved the technical picture. As the price action in both EUR/USD and cable was be mostly driven by the dollar side of the story, we still saw less reasons for big gains in this cross rate than might be the case for EUR/USD.
However, until yesterday, the day-to-day momentum remained clearly EUR/GBP supportive. Yesterday, the topside in EUR/GBP became difficult. So, maybe a window of opportunity. Is there opening for a correction on the recent EUR/GBP rally?

EURGBP