Yesterday, the EUR/USD cross rate showed two different faces. During the morning session in Europe, EUR/USD quickly dropped from the 1.4825-area to the 1.4720 area. Some easing in global market tensions helped the dollar to regain some ground early in the session. However, this dollar rebound was short-lived. In the afternoon, sentiment for EUR/USD again changed. In a speech, Fed‘s Kohn admitted that the current market turmoil could slow the US economy more abruptly than thought, opening the way for additional interest rate cuts starting at the December 11 meeting. Initially the EUR/USD reaction was rather moderate. The prospect of some Fed support is a positive for the markets and for the economy, but the loss of interest rate support going forward makes the dollar picture somewhat less straightforward. Later in the session, the stock market rally again triggered a sharp rebound in EUR/JPY and this also filtered trough into EUR/USD. After the close in Europe, EUR/USD erased the earlier losses and returned to the 1.4825 area, where it is still trading this morning.
Today, the US calendar is well filled, but we again expect global market themes to dominate the sentiment also for EUR/USD trading.
At the start of this week, we advocated that EUR/USD could be in for some correction after the recent sharp run higher. Yesterday morning it looked as if the market was going our way, but the sharp stock market rebound and the prospect for more Fed rate cuts spoiled the game. With respect to the stock market rebound, we’re not convinced that this move will continue at yesterday’s speed. In this respect, the upward pressure from EUR/JPY on EUR/USD should become less pronounced as well.
We stick to our view that the long standing trend in EUR/USD is clearly to the upside and that this remains a buy-on-dips market.
Short-term, we still hope for a (more pronounced) correction to reinstall/add to EUR/USD long positions. Yesterday’s lows in the 1.4715 area now are a first obvious support level. A drop below the 1.4650 uptrendline would suggest that the correction could have some stronger legs.
Yesterday, USD/JPY extended the rebound that started on Tuesday morning. The stock market rally, a Pavlov reaction to the rate ‘cut announcement’ from Fed’s Kohn, triggered a scaling back of safe haven yen long positions. USD/JPY gained more than two big figures and came close to the 110.50 area late in US trading yesterday, but is back in the 110-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 can only 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 and we were on the look-out for a more pronounced correction in the yen cross rates to add/reinstall yen long positions. After yesterday’s move higher, we now come closer to levels that could be attractive to reinstall yen longs, we think. If the stock market rebound were to lose momentum over next days, this could be a good time to buy back into the yen, we think. A rebreak above the 111.75 area would be a first warning signal that the yen positive momentum is waning (stop loss) and that the correction has further to go.
Yesterday, the sterling finally managed to regain some ground, both against the dollar and the single currency. The EUR/USD slide during the morning session Europe and improved sentiment on riskier assets after the speech of Fed’s Kohn made sterling shorts to book some profits on the recent sharp battering of the UK currency. EUR/GBP yesterday dropped from the 0.7180 area to the 0.7125 area but already returned to 0.7140 at the moment of writing.
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. This morning’s UK nationwide housing prices in this respect only confirm the worsening of the situation in the UK housing market.
Today, the UK calendar is well filled with lending data, CBI distributive trades and a series of BOE speakers. Especially, the BOE’s view on the economic could yield quite some market relevant headlines.
Earlier this week we advocated that there was room some sterling positive correction in case of a cooling in global market tensions short-term. Yesterday’s move in this respect opens some perspective. We would now look to buy back into EUR/GBP in the low 0.71-area (yesterday’s lows). Nevertheless, as we think that the market underestimates the chances for a BOE rate cut next week, we think that there is not that much reason for more sterling gains from the current levels.
