On Monday, EUR/USD experienced quite a volatile trading session. At the start of the new trading week, it looked as if EUR/USD would continue its rally from last week. The currency pair jumped higher at the start of trading in Europe and set a new recovery high in the 1.4245 area already before noon. A strong performance of the equity markets worldwide and improving eco data in the US and elsewhere in the world still caused investors to scale back safe-haven USD positions. However, the dollar sell-off slowed later in the session and EUR/USD even gave back most of its early gains. The pair closed the session at 1.4159, little change from the 1.4158 close on Friday evening.
Today, the calendar is rather thin. In Europe, the April unemployment data will be published but they are no market mover. In the US, only some second tier data, including the pending home sales, will be published. So, one might expect the performance of the stock markets to remain the single most important factor for currency trading. In this respect it will be interesting to see whether the S&P can break above the key 943 area in a sustainable way.
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. During its visit to China, Mr Geithner tries to convince (Chinese) investors that the Fed will not monetize its debt, but at least for now, the well-known US arguments on the attractiveness US Treasuries have no big impact on the currency markets as the dollar (trade weighted) continues to trade near the year low. The swings in risk appetite/risk aversion remain the most important factor for EUR/USD trading in a day-to-day perspective. 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 or at least prevent a major comeback of the USD. Of course, the dollar can not continue to decline every day on the same arguments that are already in place for quite some time. On the other hand, the EUR/USD currency pair is ‘gradually’ reaching a level that might become a reason for some nervousness on the competitive position of the euro-area, too. In this respect, markets will take a close look whether the ECB will give any more weight to the value of the currency at is press conference later this week. The question remains whether the ECB is prepared/able to do anything about it, if it would want to do so. In the past, the press conference was not really the preferred forum to make statements on the currency markets. In case Trichet made any comments on the currency markets, it most often happened in the context of a G20 meeting.
The ST outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). Long-term, we maintain our standing buy-on-dips approach. In a day-to-day perspective, we are not in a hurry to add to EUR/USD long exposure at the current levels and look for a correction closer towards to 1.3740 support area to add EUR/USD long positions. We are well aware that this strategy contains the risk to miss another up-leg, especially in case stocks (or for example oil) would continue their rebound. The least one can say is that there is currently no reason to fight the strongly established EUR/USD uptrend yet. On the upside, a break above the 1.4246 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 showed quite a different picture compared to most other USD cross rates. As was already the case recently, this cross rate was again less sensitive to the global USD negative sentiment. Both currencies at some point in the past were seen as the safe havens and at the current juncture markets still handles this cross rate different compared the likes of USD/EUR or USD/AUD. Yesterday, the dollar even managed to regain most of Friday’s losses in the wake the strong stock market performance worldwide and a decent US ISM manufacturing. USD/JPY closed the session at 96.59, compared to 95.34 on Friday evening.
Overnight, USD/JPY basically traded sideways. In Asia, most stock market show more limited gains compared to the rally yesterday in Europe and in the US. There were no important eco data in Japan this morning. The Japanese finance minister saw manufacturers gradually lifting their output from very low levels but a full recovery may not come until early next year.
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. We maintain a buy-ondips approach.
On Monday, sterling resumed its uptrend, both against the dollar and the euro. The move already started at the opening of trading in Europe and continued later in the session. A better than expected PMI from the manufacturing sector and some less negative data on the UK housing sector supported the sterling positive sentiment and this caused the EUR/GBP to drop below the key 0.8638 support area as cable continued to outperform EUR/USD. The pair closed the session at 0.8610, compared to 0.8746 on Friday.
Today, the lending data and the PMI for the construction sector are scheduled for release.
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 as EUR/GBP is falling below the 0.8637 level. If this move would be confirmed over the next days, it would force us to leave our longstanding buy-on-dips approach in EUR/GBP to a sell-on-upticksstrategy. We don’t expect swift and forceful break lower. Nevertheless, a sustained break below this level would be a serious signal that something has really changed in the market sentiment toward the UK currency. Already last week, we advocated putting stop-loss protection on EUR/GBP long exposure in case of a break below this level. We hold on view for now.
