On Tuesday, the dollar was sold across the board, driving the dollar index to a new four month low of 82.30, confirming the dollar bearish double top on the charts. Profit taking in US and global equity markets on Monday ran out of steam. European and US bourses ended mixed to slightly lower. In other markets, commodities did very well with oil testing the $60/barrel level. Also the few eco data, essentially from the UK, confirmed the string of so-called green shoots raising hopes that the worst of the global economic slump is over. So, risk aversion that temporarily appeared on Monday receded yesterday, explaining the broad weakness of the dollar.
EUR/USD that looked ripe for some correction after Friday’s surge and ahead of key resistance (1.3738) drew yesterday some support from the broad dollar weakness and inched again higher. After a broadly sideways trading session in Asia, the euro took off and the EUR/USD pair hit an intra-day high at 1.3707, at the time the US trade balance figures were published. The trade balance was fairly encouraging as the deficit widened less than expected in March, following a very pronounced narrowing in February. However, the euro was quickly sold and the pair retreated to about opening levels in the vicinity of 1.3580, where support kicked in and the pair rebounded to the 1.3648 close, up from the 1.3582 close on Monday.
Overnight, the euro remained well bid and the pair surged to 1.3722, but receded afterwards to about 1.3690 currently. A FT opinion article by David Walker on the possibility the US might lose its triple A rating got quite some attention, even if it didn’t contain much new elements. It remembered investors about the fiscal deficit, debt and hidden liabilities and its financing that is currently largely depended on capital inflows. The reaction on the article, that doesn’t contain new facts and the vulnerability of the dollar on the charts show that dollar sentiment is very fragile. We emphasize abundantly the technical charts: the dollar index shows a double top formation, the USD/JPY pair tests the neckline of such a configuration while the EUR/USD pair is only a whisker away from a showing double bottom formation. While we think that EUR/USD resistance will hold for now, a break shouldn’t be ignored, especially if a similar break occurs in USD/JPY. We could easily slip into a confidence crisis.
Today, the US eco calendar is busy and interesting with all eyes on the April retail sales. Consumption, about 70% of GDP, was better than expected in Q1 and helped moderate the fall in growth. The April retail sales data will give us a hint how Q2 has started. An upward surprise would bolster hopes that the economy could stop contracting in H2 of this year. While it would stimulate equities and thus revive risk appetite, recently a negative for the dollar, we aren’t convinced that the dollar will indeed be sold in such a scenario. Other eco data will be less important, but several Fed and other prominent speakers (see calendar). In the euro area, the March EMU industrial production report will be released, but it is outdated and therefore not influential for trading. A speech of ECB Weber might contain some remarks on the euro.
Concluding, dollar sentiment is negative, the retail sales will be key, but the technicals shouldn’t be neglected. A break above key resistance, not our favourite scenario might accelerate the ascent of EUR/USD. 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), where some buy-on-dip tactics is favoured.
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 received a better bid when investors turned more courageous. This pattern was a few times interrupted by central bankers. However, those CBinitiated 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. However, technical considerations make us think that the EUR/USD couple needs some consolidation/correction following recent gains. A correction in the equity markets would nicely fit into that expectation.
On Tuesday, USD/JPY slid again one yen to 96.45, the third consecutive session the dollar lost ground. Overnight, the yen remains strong, but trades still close to yesterday’s closing levels. The story about the possibility the US might lose its AAA status played some role, contrary to the eco data that were uneventful and equities that traded mildly positive. However, also in USD/JPY, it is the general dollar sentiment and the technical picture that causes excitement. The pair looks on its way to build a dollar negative triple top/ head and shoulder configuration. It currently tests the neckline at 95.63. A sustained drop below would open the road for a substantial further decline towards territory below 90 with intermediate support at about 93.50. There is some talk in the market about potential fund repatriations linked to redemptions and coupon payments in the US Treasury markets, but we have no precise indications about these. Given the high profile nature of the technical picture, we suspect that a break lower won’t happen without a tough fight and probably needs some negative dollar headline news. So we remain a bit skeptical, but in case of a break would seriously contemplate whether a change in strategy (see below) is needed
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 Tuesday, EUR/GBP reversed course after three winning sessions that brought the pair from a 0.8764 low to a 0.9037 high. Surprisingly strong eco data might offer the explanation for the sterling revival. While in the overnight Asian session, investors ignored the stronger BRC and RICS reports on retail and housing, European investors did pick up the signal and bought sterling against euro from the onset of the session. The down-move in EUR/GBP continued well into the afternoon when the pair bottomed around 0.8914, a handsome gain of about 100 ticks from intra-day highs. The move was supported in the morning by better than expected production figures and in the afternoon by a less bad labour market report. While it was a strong performance of sterling it was insignificant from a technical point of view.
Overnight, moves were limited, but with a slightly positive bias for the euro, as the general sentiment was dollar negative. The UK eco calendar is empty, but markets will closely look to the BoE quarterly inflation report. Will the recent upped pace of quantitative easing lead to an upward revision of inflation (in two years time) and in the economy? Or is inflation still well below 2% in two year’s time and thus opening the door for a still more aggressive policy. In the latter case, sterling might be a victim. What about the green shoots? Will the BoE downplay these or on the contrary stress them? Will there be talk about the way to exit the QE policy? Many items that might impact sterling trading. All in all, we nevertheless think it is unlikely EUR/GBP will leave its sideways range of 0.8765 and 0.9156.
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 the pair again tested 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. Shortterm 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.
