On Thursday, EUR/USD started trading in Europe in the 1.3825 area after a downward correction overnight. However, the down-move had no strong legs even as European stocks extended the decline in the US on Wednesday evening. The pair first hovered in the low 1.38 area but gradually the single currency regained ground again. Trading in the first place was order/technically driven, but the improvement in the EU sentiment indicators might have played a (limited) role, too. Later in the session, the US data flow was mixed to slightly better then expected. At first, those data failed to give stocks a clear direction but even at that time the euro remained well bid and EUR/USD even regained the 1.39 mark. Uncertainty in the run-up the to the 7- year US bond auction might have caused some USD caution at that time. Later in the session, an improving global risk appetite continued to support the single currency. EUR/USD closed the session at 1.3940 compared to 1.3825 on Friday. In a speech, ECB’s Constancio said the US could face a problem with the dollar, but at the same time he said he didn’t believe in any collapse of the US dollar. As far as we know, he didn’t draw in conclusions for the ECB policy, but it is a first indication that the euro is popping up on the ECB’s radar screen.
Today, the calendar is again well filled on both sides of the Atlantic, but not all of the releases have a big market moving potential. In Europe, the M3 data and the CPI flash estimate will be published. European inflation dropping below 0% will spark quite some headlines on the screens, but inflation is not really a big issue for the currency market. The US data have more market moving potential with the 1st revision of the Q1 GDP, the Chicago PMI and the final Michigan consumer confidence scheduled for release. A reaction on the currency markets, if any, will most probably go via the reaction on equity markets. Looking at the recent price action, the least one can say is that stocks have remained well bid, as the news flow was not always outright positive. This overall risk-positive attitude is a EUR/USD supportive factor, too.
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). Yesterday, we indicated that we were not in a hurry to add EUR/USD long exposure and that we were watching out for some correction. The least one can say is that the correction was very short-lived and that the euro momentum remains constructive. Longer-term, we maintain our standing buyon- 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 the upside, a break above the 1.4051 reaction high would herald more dollar pain. 1.4364, 1.4719 and 1.4866 (all MT reaction highs) are the next high profile resistance levels on the charts
On Thursday, USD/JPY was well bid, especially during the Asian trading hours. Headlines of Japanese investors buying foreign assets via investment trust was said to have supported this move. The move was extended early in US trading, but the rally shifted into a lower gear. It was again remarkable that the correlation between USD/JPY and the stock market performance was rather light. USD/JPY closed the session at 96.85 compared to 95.34 on Wednesday.
Overnight, USD/JPY lost slightly ground, giving up a (very small) part of yesterday’s gains. Japanese data were mixed, but as usual only had a very limited impact on yen trading. Some overall underlying dollar weakness probably is the best explanation for this USD/JPY drift.
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 considerations will continue to play an important role in USD/JPY trading. After the rejected test of the downside, we still see room for a correction higher in the established trading range.
On Thursday, the standing sterling rebound ran out of steam. As was the case in most other major currency crosses, we assume technical factors to have played an important role. Sterling had a good run recently and short-term investor took profit on EUR/GBP short positions ahead of the key support levels that came within striking distance. On top of that the news flow was less sterling supportive. The CBI distributive trades report showed some disappointing readings and BoE’s Blanchflower sounded rather negative on the UK growth performance for this and next year. EUR/GBP moved higher throughout the session and close the day at 0.8746, compared to 0.8669 on Wednesday.
Overnight, GfK consumer confidence stabilized at a 11 month high, but this was slightly below the market consensus. Nationwide house prices came out slightly better than expected as price showed an unexpected monthly rise of 1.2%.
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. Yesterday, we indicated that we didn’t expect a swift and forceful break of this level and yesterday’s price action seems to confirm this view. Short-term, the 0.8637 area still looks able to do its job as support. However won’t cry victory yet. Short-term players can look the play the 0.8637/90.37 trading range. Within this range we still slightly prefer a buy-on-dips approach, but we keep tight stop-loss protection to defend positions against the break of the 0.8637 area.
