On Tuesday, EUR/USD initially showed a remarkably stable trading pattern. The single currency dropped to the 1.30 area on Monday evening, but largely ignored the early losses on the European stock markets and continued to hover around the 1.30 mark. The uncertainty on the Mexican flu already lost its grip on global markets. EUR/USD briefly tested bids below 1.30 at the start of US trading but later, sentiment on global markets improved and this also gave the euro a better bid. US consumer confidence and the Richmond Fed survey also came out better than expected and helped stocks and the EUR/USD pair to take advantage from receding risk aversion. EUR/USD even performed quite a strong rebound after the close of the European markets. At that time, ECB’s Bini Smaghi in a speech raised questions on the implementation of unconventional measures like the buying of private assets or government bonds, confirming the cautious ECB approach on this item. EUR/USD closed the session at 1.3149, compared to 1.3036 on Monday evening.
Today, the eco calendar is well-filled in Europe as well as in the US. In Europe, the EC confidence indicators are on the agenda. In the US, investors watch out for the first estimate of the Q1 GDP. Later in the session, the FOMC will announce its monetary policy decision. An improvement in the EU sentiment indicators shouldn’t come as a surprise anymore. The US GDP will receive quite some attention. The consensus expects the US economy to have contracted and an annualized 4.7%. As always, the contributions from inventories and net exports to growth are difficult to predict and might cause quite a sharp deviation from consensus. Any reaction on the currency markets probably will be indirect and determined by the reaction on equity markets. In this respect, a not-too-negative figure might be EUR/USD supportive. With respect to the Fed meeting, we don’t expect any high profile news. Investors will monitor the Fed assessment of the implementation of its QE measures. It is probably too early to expect any hints on additional measures. It will also be interesting to see how much weight Bernanke &Co will give to ‘greens shoots’ of recovery that where mentioned in the Fed’s Beige book. We also keep a close look at the US bond markets. US 10 and 30-year yields are at (or even above) key resistance levels. This at least suggests some pressure on the Fed, and potentially also on the dollar. Aside from those data and the Fed meeting, the consequences/results of the stress tests of the US banking sector end the Mexican flu remain wild cards for global markets. However, we have the impression that after all, global investor sentiment isn’t that negative and this should be a constructive environment for the single currency.
Global context. Over the previous months the currency markets were driven by very different factors. The swings in risk appetite/risk aversion were a dominant factor on 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 positions as there was growing uncertainty on the non-conventional measures the ECB intends to announce at the May meeting. 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. At the start of this week, a new spike in risk aversion due to the Mexican flu and uncertainty on the outcome of the US stress tests caused EUR/USD to give up most of last week’s gains. However, at least for now the impact of those to themes on global markets and on EUR/USD was remarkably limited and short-lived.
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. For now EUR/USD develops in a short-term trading range between 1.2886 and 1.3301. In a day-to-day perspective, we have to admit that EUR/USD is better protected than we thought would be the case at the start of the week.
On Tuesday, USD/JPY still set a new reaction low (95.63) early in the session. However, late in the session global pressures eased and the pair recouped the major part of the early losses to close the session at 96.45, compared to 96.77 on Monday evening
Today, Japanese markets are close local holiday.
Global context. Over the previous months, markets 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 and advocated partial protection/profit taking on USD/JPY long positions. The technical picture also supported the case for a correction. The trend in this pair is still negative, but we have the impression that the slide might shift into a lower gear.
On Tuesday, sterling trading was driven by conflicting signals. Global uncertainty caused some sterling caution early in the session. However a better than expected CBI distributive trades report helped the UK currency to recoup the earlier losses. However, this move was also not sustainable and a global euro rebound later in the session caused the pair to close the session near the intraday lows at 0.8986 compared to 0.8894 Monday evening
The UK eco calendar is empty today.
Global medium term context. After a forceful rebound in 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/GBP moved away from the recent lows, calling off 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 pair might settle in a consolidation pattern between 0.8787 (reaction low) and 0.9156 (neckline). We continue to slightly prefer a buy-on-dips approach in case of return action to the lower end of this consolidation pattern.
