On Tuesday, the trading pattern in EUR/USD initially was a bit similar to what happened on Monday. The euro was well bid in (albeit thin) Asian trading; the pair lost ground in Europe but revisited the recent highs early in the US session. Trading was again very much order driven with not much eco headlines to explain the moves. However, later in the session, the pair again behaved more in line with the ‘usual’ trading dynamics. The stock market rally slowed and the major indices even showed some moderated losses. This was also a good reason to lock in some recent gains in EUR/USD. Ongoing speculation/market talk that the US stress tests for the banking sector might show rather large capital needs added to a more cautious investor sentiment. Lingering uncertainty ahead of tomorrow’s ECB meeting might have played a role, too. So, EUR/USD encountered a profit taking move later in session and closed the day at 1.3330, compared to 1.3406 on Monday evening. Fed’s Bernanke in its appearance before a congressional panel painted a cautiously positive picture for the US economy and suggested that most of the new capital needs that might come out of the stress tests might be raised from private sources.
Today, the calendar in Europe contains the final services PMI and the March retail sales. We don’t expect those data to bring much new info to the markets. In the US, markets will watch out for the ADP labour market report. It is (much) too early to expect a material improvement in the labour market. Nevertheless, it will be interesting to see whether there are already signs that the pace of job losses might slow. The market debate/leaks/rumours on the outcome of the stress tests for the US banking sector will remain a (temporary?) source of uncertainty for global markets. Together with a more euro cautious attitude ahead of the ECB meeting, the euro might face some additional downward pressure short-term.
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. 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 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. Longer-term, we remain dollar cautious as the execution of the quantitative easing in the US remains a factor of uncertainty for the US bond markets and for the USD. In a day-to-day perspective, the euro might cede some ground ahead of the outcome of the US banking stress test and ahead of tomorrow’s 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 and EUR/USD set a new ST reaction low just below 1.29 from where a rebound started. Short-term, the pair failed to regain the 1.34 resistance area in a sustainable way. This suggests a pause or even a small correction in the recent euro rebound. 1.3582 is the next important resistance level on the charts. We still look to buy EUR/USD on dips, but hope to get a chance to pick the pair up lower in the 1.2900/1.3400 ST trading range. A sustained drop below the 1.2880 support area would call off the ST euro positive configuration.
On Monday, USD/JPY was traded in a narrow 98.60/99.20 trading range. In fact, the pair was hardly affected by the swings in some other cross rates or by the (small) losses on the US stock markets. USD/JPY closed the session at 98.82, almost unchanged from the 98.80 close on Monday.
Today, Japanese markets are still closed for the golden week holidays. Nevertheless, investors’ turning a bit more cautious ahead of the outcome of the US stress tests help the yen to record some gains against most other majors, including the dollar, the euro and the likes of the Aussie dollar.
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 another rebound. However, this rebound again halted ahead of the 100/101.45 resistance area. So, range trading in the 95.63/101.45 trading range remains the preferred scenario. In a day-to-day perspective, the pair may drift still a lower within this range.
On Tuesday, sterling took a strong start to the new trading week (UK markets were closed on Monday). A global positive investor sentiment and a growing feeling in the market that also the UK economy might have come closer to a bottom supported the UK currency. The feeling was reinforced later in the session as the PMI for the UK construction sector came out materially better (less negative) than expected. The sterling rebound slowed later in the session. Nevertheless, EUR/GBP recorded a close at 0.8835, compared to 0.8928 on Monday evening.
Overnight, nationwide consumer confidence rebounded sharply from 42 to 50. On the other hand, the BRC shop price index declined (-0.5 M/M; 1.4% Y/Y versus 0.4% M/M and 2.0% Y/Y in March). Sterling shows some limited gains against the euro this morning.
Later today, the Halifax house prices and the PMI for the services sector. The services PMI already showed some improvement over the previous months and in the housing sector there were also some cautious signals that a bottoming out might be developing. If confirmed, this could fuel the sterling positive sentiment. However, we don’t expect a clear break of key support levels ahead of tomorrow’s ECB and BoE interest rate decisions.
Global medium term context. After a forceful rebound in March, EUR/GBP was 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. We maintain a cautious buy-on-dip approach. 0.8787 (reaction low) is the first support on the charts. 0.8637 (February low) is the key point of reference. A sustained break below this level would question our long-standing sterling skeptic approach.
