On Wednesday, EUR/USD initially hovered up and down between 1.39 and 1.40. The single currency was well bid early in the session as European stocks tried to extend the stock market rebound in the US on Monday evening. However, global investors gradually turned somewhat more cautious and this also caused some profit taking on Monday’s EUR/USD rebound. At first, there was no clear trading trend but as US stock market indices ceded further ground later in the session, the single currency came under additional pressure, too. So, the swings in global risk appetite were again the most important (intra-day) factor for EUR/USD trading. The pair closed the session at 1.3825, compared to 1.3985 on Tuesday. Interestingly, the dollar ignored another sell-off on the US bond markets. Of course, if stocks would come under pressure due to rising (US) bond yields, this would make the assessment of the potential impact on the dollar even more complicated as is already the case right now.
Today, the calendar is well filled on both sides of the Atlantic. In Europe, markets watch out for the EMU confidence indicators. In the US, the durable orders, jobless claims and new home sales are scheduled for release. Later in the session, the US Treasury will auction $26B of 7-year bonds.
Over the previous weeks, market sentiment turned again more euro positive/dollar negative. The euro continues to profit from improved global risk appetite. On top of that, investors have become less at ease with dollar long exposure as the Fed, in the minutes of the April meeting, kept the door open for more securities’ buying (some will say printing more dollars) if necessary. The swings in risk appetite/risk aversion remain the most important factor for EUR/USD trading in a day-to-day perspective. Nevertheless, in a longer term perspective, uncertainty on the results/side effects of the aggressive monetary and budgetary approach in the US will probably continue to weigh on the US dollar. In this respect, doubts on the LT credit quality of US government paper are becoming an issue, too. S&P putting the UK AAA rating on negative outlook was quite an important warning signal as the US is more or less in a similar position.
The ST outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). A drop below this level would be an indication that the correction has some further to go (e.g. in case stocks were to fall prey to a more pronounced correction). The longer-term outlook remains euro positive as long as above the 1.2886 level (April low). After the recent rally, we are not in a hurry to add EUR/USD long exposure and watch out how far this correction has to go. Nevertheless, we maintain our standing buy-on-dips approach. In case of a drop below 1.3739, the 1.3424/1.3375 area (May 18 reaction low/200 MA) is the next important support level on the technical charts.
On Wednesday, USD/JPY experienced quite an uneventful trading session. The pair roughly hovered in a 95.00 to 95.50 trading range (except for a brief spike lower after the open of the US stock markets). Remarkably, the decline on the US stock markets hardly had any impact on intraday price action in this cross rate. USD/JPY closed the session at 95.34, compared to 95.03 on Tuesday evening.
Overnight, USD/JPY even moved substantially higher. The Nikkei (and most other Asian stock markets) ignored this morning the correction in the US yesterday. Japanese retail sales data were slightly better than expected. There was a lot of talk on retail investment in foreign assets (via new investment trusts) and this was seen as a potential source of yen selling.
Global context. Over the previous weeks, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The ‘traditional link’ between USD/JPY and the performance of global stock markets/risk appetite was no longer as tight is it used to be some time ago. Global dollar weakness was the name of the game. USD/JPY came close to the key 93.54 range bottom, but a break didn’t occur probably as markets fear Japanese (verbal) action in case of additional yen gains. For now, we think that technical consideration will continue to play an important role in USD/JPY trading. After the rejected test of the downside, we see room for a correction higher in the established trading range.
On Wednesday, sterling extended its rebound against the euro. We didn’t see any specific factor to explain yesterday’s move. Already for quite some time, sterling is experiencing strong buying interest from long term investment accounts trying to take advantage of a perceived undervaluation of sterling (against the euro as well as against other major currencies). Even negative news headlines (like last week’s S&P negative outlook on the UK’s AAA rating) were not really able to stop the ascent of the UK currency. So EUR/GBP continued its downtrend and closed the session at 0.8669, compared to 0.8780 on Tuesday.
Today, the UK calendar contains the CBI quarterly distributive trades. A further improvement in the outlook for the sector might support the sterling positive sentiment and trigger a test of the key 0.8637 range bottom.
Recently, we considered the rebound in sterling to be still corrective in nature. Sterling might be undervalued in a long-term perspective, but we considered it too early to bet on a sustained sterling rebound. We saw the aggressive BoE QE policy (even extended at the previous BoE meeting) as a reason to stay cautious on sterling (for a similar reason we stayed dollar skeptic). We don’t see any change in the UK monetary policy assessment, but as we give much weight to the technical charts in our tactical approach, we can’t but draw conclusions if EUR/GBP were to fall below the 0.8637 level in a sustainable way. If so, this would force us to leave our longstanding buy-on-dips approach in EUR/GBP to a sell-on-upticks-strategy. We don’t expect a swift and forceful break of this level. Nevertheless, such a break would be a serious warning sign that something is changing in market sentiment towards the UK currency. A further improvement in global investors’ sentiment, if it were to occur, could continue to be a sterling supportive factor.
