Yesterday, financial markets again traded very nervous and sentiment several times altered between hope and fear. This was the case on the bond and on the stock markets, but this time also left some traces in forex trading, even if the absolute changes at the end of the day were limited.

The dollar tried to regain some ground against the euro early in the session, but nervous swings in stock market sentiment, a better than expect (German) business confidence and sharply higher German inflation data pushed the single currency to test the 1.49 barrier. However the move stalled and later in the session EUR/USD returned to the 1.4820 area, despite a series of US data confirming the risk for a slowing in economic activity.

The combination of rather strong EU business confidence data, especially from the manufacturing sector and sharply rising inflation deserves attention. A sustained correction in EUR/USD needs the backing of a change in fundamentals or a change in market perception on the relative interest path of the Fed and the ECB. In this respect, the markets getting more convinced that the ECB could join the Fed in its easing cycle might be an important factor in the slowing of the ascent of the euro against the dollar. Yesterday’s European eco of course go against such a line of thinking. So, at least the European data don’t suggest a major U-turn in the EUR/USD trend anytime soon.

This longer-term assessment doesn’t exclude a shot-term correction on the impressive euro rally/dollar sell-off over the previous weeks though. So, in a day-to-day perspective, we hold on to our view that in case global market tension ease, there might be some room for consolidation and this might also help to unwind some overbought conditions in EUR/USD short-term.

So, while dollar negative longer term, we wait for a more pronounced correction to reinstall EUR/USD long positions. The steep daily uptrend line (today) coming in at 1.4630 is a first important point of reference. A drop below could signal that we are in for a more pronounced correction.

Today, the US housing data and durable orders deserve some attention. While later in the session two Fed speakers and the Fed Beige book are worth looking at.

On the other side of the world, the Chinese-EU summit yielded a general statement that both parties will try reduce global imbalances and prevent big swings in foreign exchange, but this won’t change the Chine policy approach of a gradual appreciation of the yuan against the dollar. This offers no real solution on the weakening of the yuan against the single currency.

Yesterday, USD/JPY trended higher even if there were some rather sharp swings intraday. A high degree of investor uncertainty as mirrored in the sometimes wild swings on the stock markets made USD/JPY revisiting the 107.55 area during the morning session in Europe, but the pair found support in the US equity rebound and tested the 109.00 area yesterday evening, a gain of more than 1.50 yen compared to the close on Tuesday. However, an unconvincing performance of the Asian stock markets this morning and some new negative headlines from the financial sector in the US made USD/JPY return to the 108.50 area at the moment of writing.

Last week, USD/JPY dropped below the key 108.95 area. From a technical point of view, this break below a neckline only can be considered as a strong positive sign for the yen in a longer term perspective.

However, despite our long-standing positive bias on the yen, we turned somewhat more cautious on the yen short-term. We still are a bit reluctant to jump on this move and to add yen long exposure at the current levels. In case stocks enter calmer waters, this might also slow down the rise of the yen short-term. So, we continue to watch out for a more pronounced correction in the yen cross rates to add/reinstall yen long positions. A re-break above the 111.75 area would be a first warning signal that the short-term yen positive momentum is waning (stop loss) and that the correction has further to go.

Yesterday, line with the sharp gyrations on other markets EUR/GBP showed some large swings intraday as well, but at the end of the day the short-term consolidation pattern in place since the end of last week was confirmed. The Sterling even made some, albeit very limited, gains against the single currency.

Longer-term the risk for pro-active BOE action/interest rate cuts and more bad news form the UK housing sector contain the risk of more sterling losses over time.

However, as we see room for some cooling in global market tensions short-term, this might also filter trough into sterling trading. So, in line with EUR/USD we hold a more cautious bias for the EUR/GBP short-term. The sterling was sold off in an aggressive way recently and some cooling of global market tensions might also help the sterling to unwind the oversold conditions. Today, there are no important data on the UK calendar.