After a EUR/JPY inspired rebound in EUR/USD on Wednesday, the dollar yesterday again tried to regain some ground against the single currency. However, the move was much alike to what happened on Wednesday morning, but in the end, contrary to Wednesday, the dollar kept some of its gains. A soon as the technical support in the 1.4720 area was tested, the move stalled and EUR/USD tried to rally back after weak housing data. This rally faltered miserably though and the pair slowly eased back down to close around 1.4740. Overnight, the EUR/USD pair briefly popped up to 1.4780, maybe helped by Bernanke cementing rate cut expectations, but trades currently again in the 1.4740 region. Correctly, we think, as a rate cut is completely discounted and Bernanke simply echoed comments of governor Kohn. Interesting, a minority in the ECB shadow Committee pleaded for a pre-emptive rate cut. If these expectations would become more engrained in market sentiment it might cap EUR/USD, but this still seems far away, as today’s EMU CPI should sow a shocking increase.
Today the US and the EU calendar contain some interesting releases. The US data (spending and income & Chicago PMI) as usual will get most attention in the currency market. However, also the European confidence data and the CPI estimate deserve attention. The latter, of course, won’t please the ECB, but after all shouldn’t be a big surprise anymore.
At the start of this week, we advocated that EUR/USD could be in for some correction after the recent sharp run higher. The price action on Wednesday morning and yesterday gave us some hope that indeed EUR/USD might be in for some consolidation or even for some further correction to unwind short-term overextended conditions. However, we have to admit that the corrections are not really convincing yet.
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 look for a (more pronounced) correction to reinstall/add to EUR/USD long positions. Wednesday’s lows in the 1.4715 area now are a first obvious support level, but only a drop below the 1.4665 uptrendline would suggest that the correction could have some stronger legs.
After rebounding to the 110.50 area on Wednesday, USD/JPY yesterday bounced up and down yesterday in a 109.50 to 110.30 range, closing at 109-93, down 10 ticks from Wednesday. Early equities weakness in the US benefited the yen, but later on equities erased losses pushing the yen back to some weaker levels. Overnight the USD/JPY pair traded with an upside bias, currently again testing the 110.30 area. Some modest return of risk appetite in Asian markets following Bernanke’s comments might have been instrumental behind the slight strengthening of the dollar. Japanese eco data, including inflation, were too close to consensus expectations to have a lasting effect on the currency.
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 Wednesday’s move higher in USD/JPY, we come closer to levels that could be attractive to reinstall yen longs, we think. If the stock markets run into resistance over next days, this could be a good time to buy back into the yen, we think. A re-break above the 111.75 area would be a first warning signal though that the yen positive momentum is waning (stop loss) and that the correction has further to go.
Yesterday, the UK data brought some mixed news. After weaker than expected house prices, also the lending data from the housing sector and the mortgage approvals confirmed the loss of momentum in this part of the UK economy. Later in the session, the CBI distributive trades report was encouraging as activity in the retail sector held up well. However, the markets mostly looked out for the BOE statement before the parliamentary committee. The BOE board members painted somewhat of a balanced picture of the UK economy regarding inflation and growth. However, with the focus on downside risks to the economy and the financial sector, there remains a decent chance on a precautionary rate cut. EUR/GBP yesterday trended cautiously higher off the lows in the 0.7125/30 area to the 0.7150 area. Today, only consumer confidence is on the agenda.
Longer-term, the risk for pro-active BOE action/interest rate cuts and more bad news from the UK housing sector contain the risk of more sterling losses over time.
Earlier this week we advocated that there was room some sterling positive correction in case of a cooling in global market tensions short-term. The better investor sentiment on Wednesday temporary helped the sterling to regain some of the recent loss, but the move already ran in to resistance yesterday. Going into next week’s BOE meeting, we think that the market underestimates the chances for a precautionary BOE rate cut. In this context, we think that there is not that much reason for more sterling gains from current levels. We look to buy EUR/GBP on dips for a retest of the highs in the 0.7216 area and if the BOE rate cut scenario materializes, a rebound to the 2003 highs at around 0.7254 could be in the cards.
