On Wednesday, it looked as if EUR/USD trading was going to experience a quite trading session. Asian and European stock markets initially didn’t find a clear trend, digesting the recent gains and investors kept a wait-and-see approach ahead of today’s ECB policy meeting and the publication of the stress test of the US banking sector later today. So, EUR/USD settled in a sideways trading range close to the 1.33 mark during the morning trading in Europe. However, the US data disturbed the silence. The US ADP labour market report for the month of April showed a significant decline in the job losses (-491K from -708K, -645K expected) and this again fueled global investor optimism. Equity indices spiked higher and EUR/USD joined this move. The pair rebounded from levels below 1.33 to the 1.3360 area. Stocks showed some nervous swings later in the session but at last closed the session again with decent gains. Comforting headlines from US Treasury Secretary Geithner on the outcome of the stress test supported overall sentiment and this also gave EUR/USD downside protection. EUR/USD closed the day at 1.3334, little changed from the 1.3330 close on Tuesday.
Today, the calendar contains the German factory orders and the US initial jobless claims. However, all attention in the markets will go to the ECB interest rate decision and to the results of the US banking stress test. We elaborate in extenso on our ECB view in a separate note that is available on the KBC dealing room website. Basically, we expect the bank to maintain a cautious approach with focus on a good functioning of the money markets and no aggressive steps towards a buying of assets. So, market players might be disappointed on this cautious approach. However, this policy largely avoids the difficulties of a complex exit strategy and in theory this should be euro supportive in a longer term perspective. Later in the session, the market focus will turn the US stress tests. However, over the previous days a lot of rumours/info became already available. Apparently, the US authorities want to give the message that some banks need additional capital but that the situation is manageable and that there is non insolvency risk. This should be enough to prevent a panicky market reaction. The stock market reaction on this item is difficult to predict, but after all there no reason to expect a major U-turn in the current positive sentiment short-term. This should continue to give the euro downside protection.
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. However, those CBinitiated swings most often were only temporary in nature. 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 EUR/USD might develop a wait-and-see pattern ahead of the outcome of the US banking stress test and the ECB policy announcement.
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 still 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 Wednesday, USD/JPY showed some rather hefty intraday swings but at the end of the day, the changes were not that big. The yen gained some ground in Asian trading as stock markets showed a more hesitant trading pattern compared to the optimism over the previous sessions and tested bids in the 98.00 area at the start of trading in Europe. In this cross rate, the ADP labour market report was also the tipping point and after the release, USD/JPY returned to the 99.00 area. However, despite a good US stock market performance, the dollar failed to hold on to its gains and USD/JPY closed the session at 98.31, compared to 98.82 on Tuesday. Apparently, there was still some unwinding to do on the recent USD/JPY rebound.
Today, Japanese traders return to their desks after the golden week holidays. There were no important eco data on the agenda. Japanese stocks show a catching-up rally on the recent gains in other markets. Most other Asian stock markets (except for China) show moderate gains. USD/JPY is being traded slightly higher compared to yesterday’s close, but the yen losses are not really impressive giving the positive stock market sentiment.
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. Nevertheless, an improvement in global investor sentiment in the month March supported a second USD/JPY up-leg and the pair tested the key 100.55/102.20 resistance area. Sustained gains beyond this area 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, we expect more range trading in the 0.98/100 range. The downside might become a bit better protected.
On Wednesday, sterling continued its uptrend against the dollar and the euro. A strong services PMI report (48.7 from 45.5) fuelled hopes that things aren’t going as bad as feared in the UK and supported the sterling positive sentiment. EUR/GBP drifted lower throughout most of the session and closed the session at 0.8809, compared to 0.8834. Overnight sterling extends its gradual up-move and is currently testing the 0.8787 (previous low) support.
Today, all eyes will be on the BoE policy meeting. The base rate will be left unchanged at 0.5%. However, the key question is whether the bank will bring any additional news on its policy of QE. More in particular, markets will watch out for any additional asset purchases as already an important part of the first £75 bln are bought. We expect the BoE to try to buy some time and wait to see how the measures already in place will filter through into the financial system and the economy. In theory this scenario shouldn’t be that negative for sterling, but we don’t have a clear view on how this will affect sterling trading in a day-to-day perspective. (Maybe some initial disappointment in case of no new info as was the case in the US bond markets after last week’s Fed decision).
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. However, the subsequent EUR/GBP rebound didn’t show a strong momentum and currency the pair again tests the 0.8787 previous low. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. 0.8637 (February low) is the key point of reference. A sustained break below this level would question our longstanding sterling skeptic approach (Stop-loss protection). For now, we don’t change tactics yet.
