On Monday, EUR/USD went through a very volatile trading session. The pair was traded in the 1.33 area at the start of trading in European. Trading conditions were thinner than usual as UK markets were closed. In an order-driven market, the pair faced a serious setback and lost almost one big figure during the morning session in Europe. Poor German retail sales and the sharp downward revision of the EC growth forecasts probably reinforced the move. However, as often is the case, the tide turned as soon as US traders joined the action. After some hesitation earlier in the session, stock markets resumed their uptrend. Global markets even reacted to the better than expected US pending home sales. This data series usually is not a market mover and illustrated the underlying positive investor sentiment. In step with the stock markets, EUR/USD performed a powerful rebound and the pair closed the session at 1.3406, compared to 1.3273 on Friday evening.
Today, the calendar in Europe is thin. In the US, the ISM of the non-manufacturing sector will be published. After the publication of other sentiment indicators recently, an improvement is widely expected in the market. Later in the session, markets will also look out for the appearance of Mr. Bernanke before the Joint Economic committee. Investor will be keen to hear his assessment on the recent economic developments and on the execution of the Fed policy going forward. Any comments on the amount and/or the pace of the buying of assets by the Fed have potential to move the markets. At this stage, the ‘uncertainty’ on the Fed policy going forward is not really a support for the US currency. Of course, the stock market performance remains an import factor for EUR/USD trading, too. In this respect, Asian stock markets shifted into lower gear this morning after the steep gains yesterday.
Global context. Over the previous months, currency markets were driven by different factors. The swings in risk appetite/risk aversion were the 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 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 nonconventional measures the ECB intends to announce at this month’s meeting. However, this correction had also no strong legs. At the end 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 as such it is also no help for the dollar. Later this week, markets might turn their attention to the ECB meeting.
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. The 1.3392 previous high is under test. 1.3582 is the next level on the charts. Even if global sentiment were to stay constructive, we would be surprised to see EUR/USD taking out this level ahead of Thursday’s ECB meeting.
On Monday, USD/JPY trading also showed some strange swings. In Asia and during most of the European trading session, the pair held a tight sideways trading pattern between 99.60 and 99.30. However, around the close of the European markets, a dollar selling move also hit USD/JPY. The move was bit strange as it happened in a positive stock market environment. So, it should be considered dollar weakness rather than yen strength. Whatever the reason, USD/JPY closed the session at 98.80, compared to 99.11 on Friday evening.
Today, Japanese markets are still closed for the golden week holidays. So trading conditions in most yen cross rates will probably remain rather thin. Most Asian stock markets are again in positive territory, but the gains are far less pronounced compared to yesterday. This could give the yen some downside protection.
Global context. Over the previous months, the yen lost part of its safe haven status as markets grew more concerned on the Japanese economic performance. An improvement in global investor sentiment during the month March supported a second up-leg in USD/JPY 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, the correction lost momentum and the pair performed quite a decent rebound. The ST trend is USD/JPY positive. A retest of the 101.45 area might be on the cards. Nevertheless, yesterday’s price action suggests that a sustained break above this key area might be difficult short-term. So, shortterm players can still consider (partial) profit taking on USD/JPY long positions in case of return action toward the 100/101.45 area.
On Monday, UK markets were closed. So sterling trading developed in thin trading conditions. EUR/GBP to some extent tracked the swings in EUR/USD. The pair closed the session at 98.28, compared to 0.8894 on Friday.
Today, the UK calendar is rather thin with only construction PMI scheduled for release. Later this week, both ECB and the BoE will hold a monetary policy meeting. Both central banks still have some issues to clarify. The ECB will present its framework for additional, non-conventional policy measures. At first sight, the BoE will have no big news to report. It is executing the policy steps that were announced in March. However, the BoE is more or less in a similar situation as is the case for the US Fed. Last week, the US bond markets reacted rather nervous as the Fed didn’t bring any additional info on its asset purchases. Will we see a similar reaction in the UK? If so, this wouldn’t be a positive factor for sterling, we think.
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.
