On Friday, EUR/USD basically developed a sideways trading pattern. This shouldn’t have come as a big surprise as most markets in Europe were closed while staffing on a lot of trading desks elsewhere in the world was thinner than usual. The US eco data (Michigan confidence, ISM), in line with some other recent data, came out better than expected. They underpinned overall investor sentiment and kept EUR/USD well bid. EUR/USD closed the session at 1.3273 compared to 1.3230 on Thursday.
Today, the calendar contains the final figure of European manufacturing PMI and some other second tier eco data in Europe. In the US, the pending home sales and the construction spending data are scheduled for release. Usually those data are no market movers. So, global sentiment will again be an important driver for trading. In this respect, the news wires give quite some attention to the China CLSA PMI returning above the boom-or-bust level in April, coming in at 50.1 from 44.8 in March. This supports investor optimism in Asia this morning and helps the euro to build out gains against the dollar and the yen. Of course, there are some ‘evergreens’ like the US banking stress test and the fate of the US auto sector. However, at least for now it looks as if markets are not that worried on those items anymore.
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 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 under moderate pressure as investors scaled back euro long positions as there was growing uncertainty on the non-conventional measures the ECB intends to announce at this month’s meeting. However, this correction also had no strong legs. During the last 10 days of April, the euro even performed a nice rebound, supported by better than expected EU sentiment indicators. As such, the 30 April Fed meeting didn’t give much new insights on the Fed’s economic assessment and policy approach. Nevertheless, the US bond markets, especially at the longer end of the curve, continue to show signs of nervousness with yields breaking above some key resistance levels. At this stage, one shouldn’t give too much weight to this factor, yet. Nevertheless, it suggests some investors’ doubts on the US monetary policy and in this respect it is also no help for the dollar. Later this week, markets might turn their attention to the ECB meeting. Nevertheless, at least for now, it doesn’t look as if the ECB meeting is a big source of uncertainty for markets.
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 from where a rebound started. The ST picture for EUR/USD looks constructive. 1.3392 is the first intermediate resistance. 1.3582 is the next level on the charts. Even if global sentiment were to stay constructive, would be surprised to see EUR/USD taking out this level ahead of Thursday’s ECB meeting.
On Thursday and on Friday, USD/JPY extended the rebound that started earlier last week. Positive global investor sentiment caused investors to scale back yen long positions.
Today, Japanese markets are closed for the golden week holidays. So trading conditions in most yen cross rates are thin. Nevertheless, the yen continues to cede ground due to additional gains on most other Asian markets.
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 and a technical correction sent USD/JPY to a 95.63 reaction low last week. Mid last week, we already indicated that the correction lost momentum and in the meantime the pair already performed quite a decent rebound. The ST trend is USD/JPY positive. A retest of the 101.45 area might be on the cards.
At the end of last week, sterling regained some ground against the single currency. UK eco data (manufacturing PMI) confirmed the market feeling that the slowdown in the UK economy might gradually shift into a lower gear. EUR/GBP closed Friday’s session at 0.8894, compared to 0.8943 on Thursday evening.
Today, the UK markets are closed.
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). The UK budget announcement and the weaker than expected Q1 GDP two weeks ago, 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-ondips approach in case of return action to the lower end of this consolidation pattern.
