On Thursday, trading was very volatile in almost all markets and the EUR/USD market was no exception. In line with the previous two sessions, the euro lost some ground in Asia and early in US trading. However, maybe a bit surprising, the single currency already gained ground ahead of the ECB interest rate decision. The solid stock market performance and, to a lesser extent, better than expected German factory orders, might have supported this move. Market volatility rose at the time of the ECB policy announcement and press conference. The pair briefly dipped on the announcement of the covered bond purchase facility, but the losses were very shortlived. Apparently, those purchases (which are quite specific in nature and no big amount) are still considered as containing less long-term inflation- and unwinding risks compared to the BoE and Fed approach. EUR/USD spiked to the 1.3450/70 area during the press conference. The euro gave up a small part of the earlier gains in step with the profit taking move on the stock markets. Nevertheless, the pair still closed the session at 1.3390, compared to 1.3334 on Wednesday.
Overnight, investors worldwide looked out for the outcome of the US stress test. The outcome of this test and the amounts of additional capital that some banks will have to raise were almost most perfectly in line with the information that had already filtered through into the markets over the previous days. The reaction on the (currency) market was very limited, especially as most banks involved immediately published plans on their strategy to address this issue.
Today, the outcome of the US stress tests might still have some limited fall-out on global markets. However, the focus now will soon turn to today’s eco calendar. The German production data will receive some attention, but all eyes will be on the US payrolls report. After the publication of the ADP labour market report, the market might prepare for a material decline in the loss of jobs according to the payrolls measure, too. There are several statistical issues that might cause a significant divergence between the ADP and the payrolls measure. In this respect, we’re not really convinced that the payrolls will already show a similar improvement as was the case for the ADP report. Whatever the outcome of the payrolls, the reaction on the currency markets will most likely go through the price action on equity markets. After yesterday’s correction on the stock market, the question might be how good the report will have to be to trigger a further improvement in investor sentiment. If the stock market rally were to shift into a lower gear, the day-to-day upside potential in the euro might become somewhat less obvious, too.
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. We don’t call victory yet and EUR/USD sentiment is affected by several conflicting influences. Nevertheless, we see yesterday’s positive euro reaction on the back of the ECB policy statement as some kind of a confirmation that the more gradually ECB approach compared to the BoE and the Fed is at least one LT supportive factor for the single currency.
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 reaction low just below 1.29 from where a rebound started. Short-term, the pair still tries 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 1.2900/1.3470 ST trading range (e.g. the 1.31 area). A sustained drop below the 1.2880 support area would call off the ST euro positive configuration.
On Thursday, USD/JPY more or less tracked the swings in the global stock markets indices. The pair recorded decent gains early in the session, but had to give up part of these gains as US stocks failed to preserve the early gains. Nevertheless, the pair still managed to close the session in positive territory (99.12, versus a 98.31 close on Wednesday).
Today, there were no important eco data in Japan. Japanese/Asian stock markets are marginally higher. In the Minutes of the April meeting, the bank still saw sever financing conditions, especially for small and midsize firms.
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. Yesterday, we indicted that the downside apparently became a bit better protected. This still looks the case.
On Thursday, the BoE monetary policy decision was the key milestone for sterling trading. Sterling started the session on a strong footing, but nervousness already rose, both in the UK bond market and in the currency market ahead of the BoE interest rate decision. The bank, as expected, kept its policy rate unchanged at 0.5%, but made a next step in its QE by raising the amount of asset purchases by £50 bn to £125 bn. Opponents of this aggressive approach might say that the BoE is ‘printing’ ever more money and this is no support for the currency. In its statement the Bank also indicated that it expects considerable economic stimulus from, among other factors, the substantial depreciation in sterling. The deepening of the policy of quantitative easing was a good reason to take profit on the recent rally in sterling and EUR/GBP jumped higher from levels around 0.8770 at the start of trading to test offers in at the 0.8930 area and close the session at 0.8916, a gain of more than one big figure compared to the 0.8809 close on Wednesday. Long-term UK bonds yesterday outperformed their European counterparts.
Today, the UK eco calendar only contains the PPI. At the current juncture this report is not really in the focus of the markets.
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 already have being advocating for quite some time that we found it too early to expect a sustained rebound of sterling. In this respect, we take some comfort from yesterday’s price action after the ECB and BoE interest rate decision. The combination of a rather aggressive QE approach by the BoE and a much more cautious approach by the ECB should continue to give the euro downside protection against sterling, at least in a short-term perspective. We hold on to our cautious buy-on-dips approach. Short-term the pair develops in a sideways trading pattern between 0.8765 and 0.9156. Intermediate resistance comes in at 0.9081 (ST reaction high). Short-term, we put the risk for some follow- through gains higher in this range. LT 0.8336 (February low) remains the key point of reference.
