On Friday, EUR/USD drifted lower throughout most of the trading session. The move started in Asia and accelerated after a speech of ECB president Trichet that came on the screens before the open of the European markets. As such, the speech didn’t bring any new insights on the ECB policy after the May meeting. However, the market focused on the uncertainty over the non-conventional measures that were preannounced at the April meeting and on the presumed rift with the government council on these measures. We don’t join the ECB critics on this item. However, especially with an empty eco calendar and as the link between stocks and EUR/USD became less tight, this ECB debate apparently is a good enough reason to unlock the stalemate in this cross rate. EUR/USD dropped below the 1.31 support area and this triggered additional euro selling. EUR/USD closed the session at 1.3044, compared to 1.3186 on Thursday.
Later today, the eco calendar only contains the US leading indicators. This leaves the global (stock) market sentiment and the ECB debate as the most obvious drivers for trading. With respect to the stock markets, the correction between stocks and the euro recently has become far less tight compared to what it was a few months ago. So, market uncertainty on the ECB policy measures most probably will continue to dominate the euro sentiment. It is difficult to see this giving the euro a big support.
Global context. EUR/USD bottomed out mid February. The market focus on the intra- EU tensions eased and the Fed steps of quantitative easing announced at the March meeting 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 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. The announcement at the early April ECB press conference that the bank will announce non-standard measures at the May meeting has gradually become a factor of uncertainty for the single currency, especially as the markets suspect some internal ECB debate on this item. We don’t join the analysis that the ECB is behind the curve and think that the more balanced approach from Trichet and co might avoid a lot of side-affects and problems of unwinding later. Nevertheless, in a short-term perspective, this ECB caution apparently is seen enough a reason for investors to scale back euro long exposure. We don’t see any reason for major euro sell-off, but the risk is for the single currency to fight an uphill battle until this factor of uncertainty is solved. On top of that, the ECB is probably even a bit ‘pleased’ with a slightly weaker euro. (Who doesn’t want a weaker currency in a context of steep economic decline when inflation is expected to stay below the policy target for a prolonged period of time)?
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. A first test of the 1.31 support area was rejected two weeks ago but at the end of last week, the bottom of the 1.3090-1.3113/1.3738 trading range has been broken. This is a short-term negative for the pair and forces us to change our short-term bias from neutral to negative. A sell-on upticks approach looks more appropriate in a day-to-day perspective. The 1.2991 previous high is the next important support level. The targets of the multiple top formation are at 1.2835, 1.2645 and 1.2487.
On Friday, USD/JPY trading again showed some intraday swings, but at the end of the day, the changes were limited. USD/JPY lost some ground early in US trading on a soft US stock market open, but the losses were reversed later in the session. USD/JPY closed the session at 99.16, little changed from the 99.27 close on Thursday.
Overnight, most Asian stock markets show limited gains. Japanese indices are close to unchanged. The yen gained a few ticks this morning. However, USD/JPY is still locked in the indecisive sideways trading pattern that was already in place last week.
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 supported a second up-leg and the pair tested the key 100.55/102.20 resistance area. 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. Currently, the pair develops a sideways, indecisive trading pattern. A sustained drop below the 98.88 area (uptrend line from the lows) could accelerate the correction.
On Friday, EUR/GBP again showed some intra-day swings. Sterling lost some ground early in the session, but overall euro weakness again drove the EUR/GBP currency pair lower later in the session. Spill-over effects from technical trading in other sterling cross rates played a role, too. EUR/GBP closed the session at 0.8822, compared to 0.8831 on Thursday. The jury is still out whether the sterling correction has finished. Nevertheless, it looks as if the easiest part of the sterling rally is over.
Today, the UK eco calendar is again empty. This morning the Rightmove house prices came at 1.8% M/M and -7.3% Y/Y (compared to 0.9% M/M and -9.0% in March). So, in line with some other indicators of late, this report suggests some tentative signs of stabilization in the UK housing market. Sterling hardly made any gains on this report. Later this week, the UK eco calendar is well packed. On top of that, UK’s darling will propose his budget proposal on Wednesday.
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 weeks, EUR/GBP was captured in an ongoing downtrend. In a longer-term 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 euro skeptic market sentiment ahead of the May ECB meeting also leaves its traces on the EUR/GBP cross rate. 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.
