On Wednesday, EUR/USD experienced again a choppy trading session, but basically the pair extended the downtrend from Tuesday. There was again not one dominant factor to explain the price action. Early in Europe, the EUR/USD cross rate went even higher supported by a decent European stock market performance (the losses were limited given the negative close in the US on Tuesday). EUR/USD tested offers just below 1.33 around noon. However, selling pressure resurfaced as soon as US traders came in. Financial newswires linked this euro decline to comments from ECB’s Weber. The ECB member was pessimistic on the (German) growth outlook, but indicated that he was no supporter to bring the ECB repo rate below 1%. He also showed a high degree of reluctance towards measures that include ECB intervention in the capital markets. We didn’t see any clear explanation for a euro decline in Mr. Weber’s comments. Nevertheless, EUR/USD nosedived going into the US eco data. Those data were mixed (CPI negative Y/Y but New York manufacturing materially better than expected) and had no lasting impact on trading. The same applies to the (weaker than expected) industrial production data. The EUR/USD decline slowed later in the session as US stocks recouped earlier losses and closed the session at 1.3227, compared to 1.3259 on Tuesday.
Today, the final European CPI and the February production data will be published but they will only have limited impact on the currency market. The US data are more interesting with the housing starts, the building permits, the jobless claims and the Philadelphia Fed survey scheduled for release. Last month, the housing data showed a surprise improvement and it will be interesting to see whether there are more signals of a bottoming out process in this sector. Also for these eco data, the market reaction will most probably go via the stock markets. We also take a close look at the global stock market reaction to the rather poor Chinese GDP release as published this morning. At least for now, the reaction on Asian markets (and on EUR/USD) is muted. Later today, the results of JPMorgan Chase will get ample coverage on the financial newswires and could have an impact on global markets.
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. On top of that, the announcement at the ECB press conference two weeks ago that the bank will announce non-standard measures at the May meeting is a factor of uncertainty for the single currency, especially as the markets suspect some internal debate on this item. So, EUR/USD is still a bit paralyzed by a balance of uncertainties and 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..3090-1.3113/1.3738 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.
On Wednesday, trading in the USD/JPY currency pair failed to develop a clear trend. Investor caution after the poor stock market close in the US on Tuesday supported the yen yesterday morning. However, the damage on the European stock markets was not excessive and later in the session US stocks even managed to overcome a weak open and closed the session with gains of around 1% for the Dow and the S&P. This stock market rebound reduced demand for the yen and USD/JPY close the session at 99.37, even slightly higher compared to the close on Tuesday.
Overnight, Asian stock are mixed and show no clear trend. The Chinese GDP growth slowed 6.1%. The figure was on the downside of the market consensus. However, for now, the market impact on the figure is limited.
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. An improvement in global investor sentiment during the month March also supported a second leg in this upmove and the pair tested the key 100.55/102.20 resistance area. However, additional/sustained gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) proved to 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 98.57 area (uptrend line from the lows) could accelerate the correction.
On Wednesday, sterling showed a remarkable performance. The UK currency posted strong gains, both against the dollar and the euro. This move occurred even as there were no important eco data in the UK. The RICS house prices, published early yesterday morning were better than expected. This might have supported the move, but sentiment has already turned more sterling friendly for quite a few sessions. Cable tested the psychological level of 1.50 and EUR/GBP in an ongoing slide lost almost one big figure. Market talk and ECB speak on the ECB preparing unconventional measures might play a role in investors’ reassessment on EUR/GBP. Regarding the eco data, except for a few series from the UK housing market, the eco data didn’t show many signals of a sustained economic improvement, yet. It was also a bit surprising for this powerful sterling rally to occur at time when UK government bonds underperformed the European bond markets. Nevertheless, EUR/GBP lost almost a full big figure and closed the session at 0.8817 compared to 0.8901 on Tuesday evening.
Overnight the BRC retail sales monitor showed a -1.2% decline in like-for-like sales, but the timing of Easter makes comparisons of sales difficult. There was no reaction in EUR/GBP on the publication of this 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. However, the subsequent rebound also failed to take out the key 0.9519 resistance area and over the previous two weeks, EUR/GBP was captured in an ongoing downtrend, bringing the pair ever closer to the key 0.8638 key support area. In a longerterm perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. However, we can’t ignore the strong sterling performance of late. So, we maintain our wait-and-see approach and are not in a hurry to (re-)install EUR/GBP long exposure. The 0.8637 reaction low is the key point of reference. A sustained break below that level would force US to reconsider a long-standing positive bias in this pair.
