After a sharp profit taking move on Monday, the EUR/USD currency pair tries to fight back and yesterday this attempt was extended, even if the pair had to give back most part of the early gains in late US and overnight trading. EUR/USD set and intraday high in early US trading at around 1.4725, just to return to the 1.4650 area this morning.
EUR/JPY is still an important driver for euro trading overall and the favourable stock market opening in Asia and Europe yesterday morning in this respect helped EUR/USD higher. The data were mildly supportive for EUR/USD as the US data (PPI and retail sales) came out soft while European growth for the 02Q3 (0.7% Q/Q) topped analyst estimates.
Today, the US calendar contains some interesting releases with the CPI, the Empire state and the Philadelphia Fed survey and the claims. We put the risk for these data come out dollar unfriendly.
Key question is whether the EUR/USD is entering a new era or whether Monday’s correction is only a short term blip in a longstanding uptrend.
Longer term, we still think that more US bad news might be in store and that the dollar is not out of the woods yet. To herald a trend reversal we also wait for a clear technical sign and this isn’t available yet. So the long standing uptrend in EUR/USD is not questioned yet.
In a short-term, day-to-day perspective, the EUR/USD pair probably entered some consolidation pattern with the 1.4750 area (topside) and the 1.4525 area (downside) the most obvious barriers. We expect these barriers to hold in the short term. As the stock market sentiment is not really convincing this morning, upside pressures for EUR/JPY on EUR/USD should not be that strong this morning. The Barclays’ confessions on its sub-prime exposure could be an important driver for all markets today.
Yesterday both USD/JPY and EUR/JPY extended the rebound that started on Tuesday. However, the move clearly lost momentum further out during the session as the rebound on global stock markets petered out and as US stocks even fell in negative territory later in the session. USD/JPY revisited the 111.75 area yesterday but is back in the 111.00 area at the momentum of writing.
The yen’s rise was also capped short-term by comments of Japan’s PM Fukuda pointing out that the yen was appreciating ‘too fast’ in the short-term.
Yen trading is in the first place still a barometer on global risk appetite/risk aversion. So, its inverted correlation with the stocks markets is the most decisive factor for yen trending. Eco data, and in particular Japanese eco data still are of second tier importance for the Japanese currency at this stage. As, for example the S&P failed to re-gain important technical resistance yesterday (1490 area) we think that risk aversion is still an important theme.
In this environment, we hold on to our yen positive bias and look to buy the yen on dips and for the longer term. The uncertainty and continued fall-out from the subprime sector will come back to haunt the markets. After the recent correction, the current levels in USD/JPY and EUR/JPY could be interesting levels to reinstall a first short position (yen long).
Yesterday, the sterling was hammered down after the publication of the BOE inflation report. The report indicated that UK inflation over time might drop below target if the Bank doesn’t cut interest rates. So rate cuts are again officially on the agenda and this was an important blow to the sterling. EUR/GBP jumped aggressively higher and cleared the 0.71 barrier to set a new high in 0.7145 area this morning, bringing EUR/GBP to the highest level in more than four years.
From a fundamental point of view, we think that already a lot of sterling negative news is priced in (both in the money market and in the currency market). On top of that, our economic scenario also envisages the possibility of rate cuts in the Eurozone area already in the first half of 2008. So, in this respect, the interest rate differential between the UK and the Euro-zone will continue to stay at decent levels for a while and at some point this should give the sterling some support.
However, in a day to day perspective, the sterling obviously is a failing knife and we don’t try to catch it. From a technical point of view, the EUR/GBP pair is extremely overbought, but we remain sidelined for now. Also for sterling trading, Barclays’ confessions with respect to its credit exposure might have some impact. Regarding the UK data markets watch out for the retail sales.
