On Friday, EUR/USD continued its remarkable rise that started on Thursday after the publication of a better than expected euro zone PMI release. On Friday, the German IFO indicator confirmed the cautiously positive signal from the PMI’s and this pulled the trigger for a new euro buying wave. One can not ignore that the move is linked to the publication of those sets of European data but, it was quite remarkable to see the euro reacting in such a strong way to European data. That hadn’t happened for quite some time. Nevertheless, the move for sure was not only euro strength, but also dollar weakness as the US currency lost ground against most other major currencies. The impact of the stock market of the US data on EUR/USD trading was rather limited. EUR/USD closed the session at 1.3242, compared to 1.3144 on Thursday. The market debate on the non-conventional ECB measures, which mentioned an source of euro weakness earlier last week has apparently faded. On top of that, the dollar decline went hand-in-hand with an underperformance of (especially LT) US bonds vis-à-vis the euro zone. Is this a sign of dollar caution going into this week’s Fed meeting?
Today, the eco calendar is again very thin, both in the US and in Europe. However, we still watch out for the speeches of ECB members to see whether they will give any hints on the non-conventional policy measures as they were discussed at last week’s non-monetary policy meeting. On top of that, markets will try to make an assessment on the potential impact of the outbreak and the spreading of swine flu in Mexico and the US. In a first stage, global uncertainty probably will be the consequence of this story. The US is closely involved, but during the current crisis, factor of global uncertainty, even if there origin was to be found in the US, often supported the safe haven currencies like the yen and the dollar. So, also the spreading of this swine flu might even by a (slightly) euro negative factor.
Global context. Over the previous months the currency markets were driven by very different factors. The swings in risk appetite/risk aversion played an important role for almost all markets and the currency market was no exception to this rule. Bad news was most often dollar supportive. The euro (more or less in step with other non-safe haven currencies) received a better bid when investors turned more courageous. This underlying pattern was a few times interrupted by the central bankers. Mid March, the dollar faced a sharp temporary setback after the Fed’s announcement to extend its policy of quantitative easing. However, those dollar fears dissipated rather soon. After the early April ECB press conference, the euro came again under pressure as investors scaled back euro long position as there was growing uncertainty on the non-conventional measures the ECB intends to announce at the May meeting. Markets suspected some internal disagreement within the ECB board on this item. However, at the end of last week, it looked as if this ECB market theme had run its course and the euro even performed a nice rebound, supported by better than expected EU sentiment indicators. We don’t draw firm conclusions from last week’s price action but it suggests that the ECB policy approach probably isn’t than negative for the single currency.
From a technical point of view, EUR/USD set a reaction high at 1.3738 mid March after the Fed meeting but soon profit taking kicked in. The bottom of the 1.3090- 1.3113/1.3738 trading range was broken and EUR/USD set a new ST reaction low just below 1.29 last week. However, the pair soon returned above the 1.31 previous low area, making the short-term picture again neutral. In a day to-day perspective, the euro rally might slow and there is even room for some profit taking on last weeks rally.
On Friday, the dollar was under some pressure overall and to some extend this was also visible in USD/JPY trading. The pair set reaction low in the 96.65 area at the start of trading in Europe. The pair than hovered up and down in a broad range around 97.00. Nevertheless, the yen held on to its gains rather well, especially if one takes into account the strong performance on the US and European equity markets. USD/JPY closed the session at 97.17, compared to 97.96 on Thursday evening.
This morning, the swine flu uncertainty also leaves its trace on currency trading. The damage on the Asian stock markets is not really that excessive. Nevertheless, the story helps the yen to extend its recent uptrend.
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 difficult. We turned more cautious on USD/JPY short-term and advocated partial protection/profit taking on USD/JPY long positions. The pair currently trades below the neckline of a short-term double top (99.31) and below the MT uptrend line from the January low. This makes the ST technical picture negative. The 2nd target of the ST double formation 97.17 has been reached. For now, we don’t row against the tide and continue to put the risk for the correction to go somewhat further.
On Friday, sterling trading again experienced quite a volatile trading session. The euro strength was the dominated trading theme early in the session and a weaker than expected Q1 GDP release supported the EUR/GBP rebound. Market rumours on the possibility of the UK losing its AAA rating still might have played a role. However, technical considerations played a role, too. Later in the session, cable succeeded a catching-up move in line with global dollar decline seen in several other USD cross rates and this triggered an intraday correction in EUR/GBP, too. EUR/GBP closed the session at 0.9027, compared to 0.8929 on Thursday.
This morning, the Hometrack housing survey revealed a -0.3% M/M and -10.1% Y/Y decline in UK house prices. Sterling hardly reacted to this indicator. Later today, we keep an eye on the BoE asset purchase facility quarterly report as it might give some insight in the execution of the BoE’s policy of quantitative easing.
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 since mid march, EUR/GBP was again captured in an ongoing downtrend. At some point, it even looked as if the pair was heading for a test of the key 0.8637 area. However, mid April, the sterling rebound ran out of steam (Reaction low in the 0.8787 area). Last week the UK budget announcement and the weaker than expected Q1 GDP again brought the fragile situation of the UK economy in the spotlights. EUR/USD returned above the 0.90 mark, calling of the short-term downward alert in this pair. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. Short-term, the might settle in a consolidation pattern between 0.8787 (reaction low) and 0.9156 (neckline). We slightly prefer a buy-on-dips approach in case of return action to the lower end of this consolidation pattern.
