On Tuesday, EUR/USD gave up a part of Monday’s gains. This move was a bit remarkable as European stock markets initially posted quite a decent performance. So, at that time, the link between investor risk appetite and EUR/USD was no longer as strong as it used to be some time ago. The US eco data (PPI and retail sales) were weaker than expected. Equity investors were disappointed by the outcome and this time the euro slipped a few ticks lower, too. The moves were far from spectacular, but they were another illustration that short-term investor sentiment towards the single currency remains rather fragile. This trend is also visible in other euro cross rates. A speech of President Obama on the economy brought no high profile new insights even as the US president saw some glimmers of hope. Mr. Bernanke said that the dollar remained the main currency of reserve and he expected that this was unlikely to change in the foreseeable future. Part of the euro weakness might be caused by rather dovish comments from ECB speakers of late. However, as long as the technical picture isn’t really damaged we only see this as erratic-like trading within the established trading barriers. EUR/USD closed the session at 1.3259, compared to 1.3368 on Monday.
Today, the European calendar is again almost empty with only a speech from ECB’s Weber scheduled. The US calendar is again better filled with the CPI, the New York empire state manufacturing index, the industrial production data and the TIC data. At the current juncture, we look in the first place to activity related data. However, the industrial production data and the New York Fed survey most often only have a limited impact on trading. The corporate earnings season and the reaction of the stock markets to published results will probably be at least as important for EUR/USD trading. In this respect, the market reaction to yesterday’s Intel results might suggest that investor sentiment is turning a bit less positive. Even as the link between EUR/USD and stocks has become a bit less tight, this reaction suggests that the upside in EUR/USD could be rather difficult today.
Global context. EUR/USD bottomed out mid February. The market focus on the intra- EU tensions eased the additional steps of the Fed towards quantitative easing during the March meeting and triggered a temporary USD sell-off. However, this USD sell-off petered out rather soon, despite the discussion on the role of the USD as reserve currency developing ahead of the G20 meeting. During the month of March, global investor sentiment grew more optimistic. Combined with the ECB holding to a more cautious approach on quantitative easing, this (temporary) supported the euro against the dollar. However, investors’ assessment of the financial and economic situation is still subject to a lot of uncertainty and even less important news headlines are sometimes able to cause rather sharp swings in sentiment that filter through in almost all markets. So, despite some temporary spikes of volatility, since the last week of March, EUR/USD basically kept a sideways trading pattern.
From a technical point of view, EUR/USD set a reaction high at 1.3738 mid March after the Fed meeting. However, the rebound failed to take out the 1.3798 previous high and profit taking kicked in. Two weeks ago, the correction bottomed out and EUR/USD again found a better bid, supported by the smaller than expected ECB rate cut, but also this move had no strong legs. Recently, we put forward a range trading strategy within the 1.3113/1.3738 trading range. We hold on to that tactics. Even as we have a LT euro positive bias, we have to admit that the euro performance recently wasn’t really impressive. In this respect, ST gains above the 1.3581 reaction high might be difficult. If the downward correction on the stock markets would continue, EUR/USD might revisit the 1.3090/1.3113 support area.
Since last week, the USD/JPY cross rate has obviously lost momentum and finally this triggered a correction on Tuesday. A rather poor stock market performance in Japan already gave the yen some support. The moved accelerated during the US trading hours as a disappointing US retails sales release caused the major US stock market indices to turn south. USD/JPY closed the session at 98.98, compared to 101.10 on Monday evening.
Overnight, Asian stock market record some additional losses and the yen extends yesterday’s gains. A senior official of the Japanese ruling party said he wanted the meet BOJ Governor Shirakawa to ask to for additional central bank action to support the economy.
Global context. Over the previous months, the market gradually came to question the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy. This hurt the yen’s safe haven status and triggered a USD/JPY rebound with the pair setting a reaction high at 99.68. This rebound ran out of steam and the pair settled in a sideways trading pattern between 93.50 and 100. The overall positive investor sentiment brought the pair again to the top of the MT trading range. Nevertheless, last week we advocated that additional/ sustained gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) would be far less easy. We turned more cautious on USD/JPY short-term and advocated partial protection/profit taking on USD/JPY long positions. A sustained drop below the 98.40 area (uptrend line from the lows) could accelerate the correction.
On Tuesday, sterling extended its rebound against the euro. We didn’t see much eco news to explain the move, but the sterling gains went hand in hand with the strong stock market performance early in the session, which was driven by a rebound in financial stocks. Technical considerations also played a role as the break below last week’s low triggered additional stop loss selling in this pair. The decline slowed later in the session, but EUR/GBP closed the session near the intraday lows at 0.8901, a loss of almost one big figure compared to the 0.8999 close on Monday. A BoE auction to purchase Gilts received a very high offer-to cover ratio, but after all the damage for the UK bond market was limited. This might have been a (slightly) sterling supportive factor, too.
Overnight the RICS house price balance improved from -78% to -73%. However, the impact on sterling trading was limited. Later today, only the DCLG UK house prices are scheduled for release.
Global medium term context. The EUR/GBP pair extensively tested the key support area (0.8663/37 area previous high) early February but the test was rejected. The break above the 0.9083/72 neckline made the technical picture for EUR/GBP again positive as it opened the way for return action to the key 0.9519 reaction high. As this resistance came closer, the EUR/GBP shifted into a lower gear and the pair even had to give up its gains. The re-break below the 0.9083/72 neckline was a short-term negative signal from a technical point of view. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. Nevertheless, with the ST technical picture turning less euro supportive, we are not in a hurry to (re-)install EUR/GBP long exposure. 0.8822 is the 3th target of the Head and Shoulder formation. The 0.8637 reaction low is the key point of reference. A sustained break below the level would force US to reconsider a long-standing positive bias in this pair.
