On Thursday, EUR/USD traded mostly sideways in a lackluster session driven by the price action in equity markets, but ended modestly higher. In the Asian session, the dollar tried to rally on equity weakness, but the decline in EUR/USD never generated much momentum, even if the pair lingered in negative territory. An attempt of the euro to fight back in the European session failed too, keeping EUR/USD sideways oriented. A better tone in equity trading in the US, despite disappointing US initial claims, helped the pair to move up, in particularly from about 1.3540 at the time the disappointing US claims were published to an intra-day high of 1.3665 late in the US session. A final, sharp drop in equities at the end of the session pushed EUR/USD lower, notably to a 1.3640 close that compares with a 1.36 close on Thursday. Since the start of the week, EUR/USD has traded sideways, close to the 1.3738 resistance. Despite, equities taking a step backward earlier this week, the dollar didn’t succeed in getting really away from that level. This shows that the dollar sentiment remains downbeat.
Interestingly, ECB Weber stressed in a speech that the ECB unconventional buying of covered bonds would be limited to maximum € 60 billion. He apparently responded to comments of some other governors that were more open to expand the program. This was maybe the reason the markets didn’t react much. The euro did well after the ECB decision last week to keep its QE policies quite restrictive and this contrasted with the more aggressive US policy. Therefore, comments on these are potentially important. Later in the session, Fed figures showed that the Fed balance sheet expanded sharply last week, fueled by a huge increase in its holdings of mortgage- backed securities and an increase in lending in the TALF facility.
Today, the EMU and US eco calendars are extremely busy and interesting. In EMU, the Q1 GDP figures will be released. The outcome should be awful with the risk of a crimp of more than 2.1% Q/Q, the consensus estimate. However, following figures for the UK and US, investors shouldn’t be surprised. Nevertheless, the euro might be vulnerable, even if EUR/USD held up very well this week despite equities trading well below last week’s levels. Later on, the attention will shift to the US where the April CPI & production data and the May Michigan consumer confidence & NY Fed manufacturing survey will be published. Earlier this week, eco data like the retail sales and the claims were somewhat disappointing in contrast with the weeks before when positive surprises prevailed. All activity data are expected to show some (modest) improvement from the previous month. The currency market still reacts a bit counternatural: stronger US data are dollar-negative as they help equities higher and dollarpositive if the data are weaker and draw equities lower. This reaction function of course won’t last forever. While we still think that EUR/USD will have difficulties to break sustainably the 1.3738 resistance now (as we suspect the S&P will have difficulties to pass the 943 resistance), we admit that the retreat of equities earlier this week couldn’t really push EUR/USD away from the resistance, suggesting that the bullish euro sentiment is still intact.
Nevertheless, a break above key resistance may accelerate the ascent of EUR/USD. The ST outlook remains euro positive as long as the pair stays above 1.3454/18 (MTMA/broken 200 day moving average), where some buy-ondip tactics is favoured. The longer-term outlook remains euro positive as long as above the 1.2886 level (April low).
Global context. Over the previous months, currency markets were driven by various factors, but the swings in risk appetite/risk aversion were the dominant ones. Bad news was often dollar supportive. The euro received a better bid when investors turned more risk-minded. This pattern was a few times interrupted by Central Bank initiated swings that were only temporary in nature though. At the end of April, the euro even performed a nice rebound, supported by better than expected EMU sentiment indicators and ongoing equity strength. Longer-term, the execution of the quantitative easing policy in the US remains a risk factor for the US bond markets and for the USD. 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 Thursday, the four day sell off in USD/JPY stopped as the pair rose from 95.30 (Wednesday’s close) to 95.80. Overnight, the greenback tried to extend its gains, but reverted to the 95.80 area at the time of writing.
Unsurprisingly, USD/JPY started to climb in the US session when equities turned higher. However, in the Asian session, the yen already failed to prolong its winning streak. So the break of the important 95.63 support level is still not confirmed. It would be premature to conclude that the upside for the yen has exhausted, but it isn’t a very convincing sign for the yen bulls. However, overnight Japanese equities did well and this time the dollar couldn’t profit in a lasting way. It seems the market is hesitant and waits for some breaking news to push the currency market in general and USD/JPY in particular in a firm direction. Machinery orders were less weak than expected in March and the Nikkei newspaper suggested that the BOJ might upgrade its economic assessment as a sign that the economy has reached the trough in the cycle. However, these positive messages were balanced by the whole price report that showed wholesale prices fall at their fastest annual pace in 22 years. The outcome of the US data to be published later today will be the dominant driver in USD/JPY via its impact on the 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 at the end of April. A renewed dollar rally failed to breach the previous highs and let to dollar selling this week that took the USD/JPY pair to 95.11 level in early trading yesterday, before some rebound occurred. While recognizing the downside risks, range trading in the 95.63/101.45 trading range remains the preferred scenario. Should we be wrong, next support stands at 93.54
On Thursday, EUR/GBP hovered in a tight sideways trading range, as it did already in the past few sessions. The market lacks momentum and direction. There were no important eco data releases in both EMU and UK. The intra-day price action mirrored the EUR/USD action. EUR/GBP moved higher in the European session, but lost its gains in the US session, closing at 0.89531 versus a 0.8973 close on Wednesday.
At the time of writing the German GDP figures come out substantially worse than expected, pushing both EUR/USD and EUR/GBP lower, the latter to about 0.8930. Given the German GDP result, the EMU GDP should also disappoint. However, later on traders will concentrate on the US eco data and equity markets for guidance.
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 in which we don’t expect a change short term. Intermediate resistance comes in at 0.9081 (ST reaction high).
