On Friday, the dollar correction continued and even accelerated across the board. The trade weighted dollar broke below its 200 day moving average and fell to its lowest level (82.529) since early January. It closed narrowly below the neckline of a double top formation at 82.63 and if confirmed in trading further out this week, it might lead to further dollar weakness. The improvement in risk appetite, the aggressive quantitative easing in the US and some green shoots in the economic data conspire to put the dollar under pressure.
In this overall negative dollar trading environment, the euro was certainly an outperformer. EUR/USD held a sideways trading pattern around Thursday’s closing levels of 1.3390 with a slight negative bias in Asian trade and with a slightly positive bias in European morning trade. Investors remained sidelined ahead of the key US payrolls. The German trade balance was reported with a bigger-than-expected surplus in March, due to an unexpected rise in exports (and imports), showing that the international economic context is improving, of which Germany, as an export nation, might proportionally profit more than others. The payrolls were less bad than expected, at - 539 000, but only slightly if the exceptional hiring of 63 000 government workers (2010 Census) were taken into account. However, the modest improvement was enough to keep sentiment positive, as reflected in another strong advance of equities and commodities. The dollar was the prime victim and EUR/USD moved steadily higher to close the session at the highs of the day (1.3633), booking easily a gain of more than two big figures. The break above the 200 day moving average was an important technical factor on Friday that caused quite some funds to buy the euro. Overnight the pair hovered essentially sideways.
Today, the US eco calendar is empty while a speech of Fed chairman Bernanke is only scheduled after session. We don’t expect the chairman, who extensively spoke on the economic and financial situation last week, to break new ground. The European calendar contains only the French and Italian production data, no movers for the currency markets. So, the EUR/USD pair might be in consolidation mode today with maybe some profit taking on Friday’s euro rally. Later on this week, trading might get very interesting. The US eco calendar is promising with amongst others the retail sales, the inflation data and the NY Fed manufacturing survey. The EMU calendar is less enticing, at least until Friday when the (bad) Q1 GDP figures will be released. Trading will be interesting because EUR/USD nears key technical levels at 1.3738. A sustained break above this level would accelerate the recent euro ascent as it would paint a double bottom on the charts with medium term targets of the configuration at 1.4589 and 1.5017. Equities play currently an important role in the FX market and also here key resistances are looming. Especially, the 943 level in the S&P is attracting a lot of attention, because a sustained break would be a technical important signal that the bear market is over. Given the high profile nature of the resistances in both EUR/USD and S&P and given the strong multi-week rally in equities, we suspect that these levels won’t be taken out so easily. Therefore, short term players might book profits on euro long exposure, while also longer term investors might prefer to put some protection on their positions. The ST outlook remains euro positive as long as the pair stays above 1.3470/52 (break-up daily and broken 200 day moving average).
Global context. Over the previous months, currency markets were driven by various factors. The swings in risk appetite/risk aversion were the dominant factor on all markets and the currency market was no exception. 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 CB-initiated swings were only temporary in nature. At the end of April, the euro even performed a nice rebound, supported by better than expected EMU sentiment indicators. Longer-term, we are still dollar cautious as the execution of the quantitative easing policy 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, but recent euro gains are encouraging. The more gradual ECB approach on quantitative easing compared to the BoE and the Fed is a LT supportive factor for the single currency.
On Friday, USD/JPY lost very moderately ground in listless trading. Indeed, contrary to EUR/USD, there is little momentum in the USD/JPY cross and that was not different on Friday. The pair traded sideways ahead of the payrolls and fell modestly lower when the dollar was sold across the board. The move from about 99.12 to 98.47 was modest though and mostly driven by movements in other crosses. EUR/JPY traded sharply higher, but the yen lost against most other currencies. The return of risk appetite is of course not exactly the environment in which one expects the yen to flourish. The USD/JPY move was also from a technical point of view insignificant.
Today, there were no eco data releases in Japan and also no important news headlines. In this context, the pair couldn’t find direction and after some volatility, the pair trades little changed compared to Friday’s close, as do Japanese equities.
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 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.
On Friday, EUR/GBP showed the similar pre-payrolls sideways trading pattern as other crosses. Sterling lost considerable ground on Thursday on the BoE decision to take its aggressive quantitative easing one step further, which contrasted with the more cautious step taken by the ECB the same day. However, on Friday morning, it apparently had no further impact. In the afternoon session, some better than expected US payrolls bolstered optimism and hit the dollar. Cable moved higher too, but lagged the movement in EUR/USD, resulting in EUR/GBP to move modestly higher too, notably from 0.8916 to 0.89508 (closing level). A technical reason, the break in the 200 day moving average of EUR/USD might be a reason for the outperformance of the euro. Of course the failure of EUR/GBP to drop below 0.8786 low earlier last week might have convinced traders that the downside in the pair is better protected, helping EUR/GBP to eke out some more gains. Also overnight the pair ticked slightly up, but without much underlying meaning. We suspect that trading will be dominated by the technicals today, in the absence of eco data of significance..
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 have been advocating for quite some time that a sustained rebound of sterling was premature. In this respect, we take some comfort from recent price action after the ECB and BoE interest rate decision and the failure to drop below key support. 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. Longer term, 0.8336 (February low) remains the key point of reference.
