On Wednesday, EUR/USD showed some intraday swings but at the end of the day little had changed. Markets are still looking for an equilibrium after the bold action from the ECB and the Fed and for now, there is no clear guide for the next directional move. Rumours and technical considerations are the dominant factors for trading.

EUR/USD set a minor corrective top on Monday at 1.3172. However, the news flow dried up and the risk rally was ripe for a correction. This setback continued yesterday morning. There was the usual market talk on all kinds of issues that might hamper a solution for several pending issues of the EMU debt crisis (Will Spain ask for a bail-out? German opposition against a European banking union...). These issues are still there, but they are not new. So, we doubt that they are the real driver for this week’s correction. For now, we see this move still as a correction after a steep rally and this correction was extended yesterday during the morning session in Europe. The intraday reversal/setback in EUR/JPY after the BOJ policy decision probably reinforced the decline in EUR/USD, too. The pair reached an intraday low just below 1.30 at the onset of the US trading session. From there, sentiment on risk improved a bit. The early morning US housing data (starts and permits) were close to expectations.
However, markets saw the data as confirming the rebound in the sector. This was a minor issue, but it helped to slow the correction in risky assets, at least temporary. EUR/USD reversed course, too. The pair recouped the early losses, supported by better than expected US existing home sales. The pair reached a corrective top in the 1.3075 area, but a break above the intraday top didn’t succeed. This was an indication that it was too early to stop the correction and to start a new up-leg. EUR/USD settled in the mid 1.30 area and closed session at 1.3049, almost unchanged from the 1.3048 close on Tuesday.

Sentiment on risk is still fragile in Asia this morning as the China HSBC manufacturing PMI was published well below the 50 boom-or-bust level (47.8 from 47.6). Risk-off trading is pushing EUR/USD south for a test of yesterday’s intraday lows just below 1.30.

Later today, the calendar is well filled. In Europe, investors will keep a close eye on the advance reading of the EMU PMI’s. Last month, there were some tentative signs that the downturn was slowing. A further cautious rebound (albeit from a very low level) is expected. We put the risk for the PMI’s to come on the better side of the consensus. If so, it will be interesting to see whether this development would be enough to stop the correction of risky assets. At least it should be no further negative for EUR/USD. Investors will also look out for auctions in France , and even more in Spain. Yesterday’s spread narrowing on Spanish bonds at least suggests that there was no ‘negative’ prepositioning in the run-up to the sale. In the US, the claims, the Philly Fed survey and the leading indicators are on the agenda. As always, the claims have (intraday) market moving potential. A slight improvement from 382K to 375K is expected.
We put the risks for a slightly higher/weaker figure. In the post-Fed era, it is not yet that clear how currencies will react to weaker than expected US data. For now, we assume that the risk theme will prevail. Aside from the eco data, several Fed members will give their assessment on the Fed approach. However, the balance of power within the Fed is clear and it is a bit too early to anticipate on further steps. During the day, there will also be plenty of headlines on the China-EU Summit, but we doubt that they will move currencies. So, yesterday, there was a first tentative sign that the correction might slow. However, negative sentiment on risk in Asia is pushing EUR/USD back below the 1.30 area.
The EMU PMI will probably have to be materially better than expected to change sentiment on risk for the better and the reverse the ST corrective trend of EUR/USD. We still look to reinstall/add EUR/USD longs, but we are in no hurry to jump in as there is no technical sign that the correction has run its course.

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 was/is heavily overbought and finally a correction kicked in . 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 in case of a more pronounced correction is still preferred.

EURUSD

On Wednesday morning USD/JPY spiked higher from the 78.50/60 support area after the decision of the BOJ to ease monetary policy as it raised the programme of asset purchases by a larger than expected JPY 10 Trillion. The pair reached an intraday top at 79.22. However, the price action later in the session was telling as the USD/JPY reversed more than initial gains. A rather cautious sentiment on risk and a decline in core bond yields might help to ‘explain’ the move.
Nevertheless, this is probably not the reaction the BOJ was hoping for.
Yesterday’s move is a clear sign that it won’t be easy for USD/JPY to fight the USD negative tide after the Fed reactivated the printing press last week.

Of late, EUR/GBP was supported by improving sentiment on risk. In this context, EUR/USD outperformed cable and EUR/GBP filled offers north of 0.81. Since the start of this week, the global risk rally slowed and the relative balance between EUR/USD and cable altered. EUR/GBP came off the recent highs and this process continued yesterday. The news flow from Europe or from the UK had only very limited impact on trading. The move was in the first place part of global markets looking for a new equilibrium after the recent central bank actions. Even so, investors still kept an eye on the Minutes of the previous BoE meeting. The BoE showed a balanced approach. Easing is still very well possible, but the positive impact of the new funding for lending scheme might do part of the job. So, at the margin, the report could be considered slightly less dovish than expected.
EUR/GBP was already on a downward trajectory and this move accelerated slightly after the publication of the minutes. The decline of the euro slowed around noon and this was also visible in EUR/GBP. Later in the session, EUR/GBP reversed the early losses and closed the session at 0.8044, even slightly better than the 0.8032 close on Tuesday evening.

Today, the price trend in EUR/USD (and thus the EMU PMI’s) will be the most relevant input for EUR/GBP trading. For the UK side, the UK retail sales and the CBI industrial trends are interesting. However, the retail sales will probably be distorted by the Olympics. So, we doubt that the market will draw firm conclusions from the report. After yesterday’s minutes, we look out whether sterling would be able to draw some support from better than expected UK data (especially in case of better CBI orders).

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. Until Monday, the day-to-day momentum remained clearly EUR/GBP supportive., but from there, the topside in EUR/GBP became difficult. Strong resistance is seen just not that far above this week’s top (0.8153/69 previous reaction highs). This suggest that a cautious sell-on-upticks might be considered. Even so, tight stop-loss protection is warranted to defend the position in case of new strong upleg of the EUR/USD headline pair.

EURGBP