On Wednesday, the EUR/USD rally shifted into a lower gear. The pair set a new re-action high in the 1.4335 area at the start of trading in Europe, but this time the move ran into resistance. A correction on the European stock markets was a good excuse to lock in some profits on EUR/USD long positions. During the morning session, the pair lost already more than one big figure and dropped below the 1.42 mark. The ADP labour market report came out marginally weaker than expected and also the US ISM non-manufacturing rose less than expected. Those data dented US stock market optimism too and helped the dollar to recoup a (small) part of recent losses. In its appearance before a Budget Congress committee, Fed’s Bernanke sounded cautiously positive on the US economy. He expressed the need to restore the US fiscal situation once the recession is over and he also advocated that the Fed would be able to avoid inflation going forward. He didn’t give any indication whether the Fed would raise the amount of its asset purchases. On the dollar, the Fed president said that he didn’t see any risk in the foreseeable future to the dollar’s status as reserve currency but added that the best way to get a strong dollar is to get a strong econ-omy. After all, the impact of Bernanke’s statement on currency trading was limited. EUR/USD closed the session at 1.4162, compared to 1.4303.
Today, the US calendar contains the weekly jobless claims and the final Q1 produc-tivity data. In Europe, markets will watch out for the press conference after the ECB interest rate decision. The focus will be on the details of the covered bond purchase program that was announced at last month’s press conference. We expect this issue to be rather technical in nature and we don’t expect this to have a big impact on the currency market. In the Q&A session, one might expect some questions on the strength of the euro/the weakness of the dollar, but we don’t expect Mr. Trichet to deviate much from the ‘usual’ G20 approach (a strong dollar is in the interest of the US, high volatility is undesirable etc).
Over the previous weeks, market sentiment turned dollar negative. The euro took profit from improved global risk appetite. On top of that there was/is still a lot of un-certainty whether the Fed will raise its program of asset purchases (including Treas-uries) and markets grew also more concerned on the fiscal situation in the US. 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 come-back of the US currency. On the other hand, the EUR/USD currency pair is ‘gradu-ally’ reaching a level that might become a reason for some nervousness on the competitive position of the euro-area, too. However, as this is a dollar problem, rather than a euro problem, we don’t expect the ECB to take action on this issue anytime soon.
The outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). The break above the intermediate high at 1.4051 only con-firmed this picture. Long-term, we maintain our standing buy-on-dips approach. Over the previous day’s we indicated that we were not in a hurry to add to EUR/USD long exposure after the recent rally and that we looked for a correction to do so. This cor-rection might be under way now. The ST momentum stay’s euro positive as long as the pair holds above the MTMA (today at 1.3998) ST players can look to buy in case of return action to that area. A break below this level would suggest that the correc-tion is gaining momentum. On the upside, next high profile resistance is seen at the December highs (1.4364 and 1.4719) and at 1.4866 (September 2008 high). A break above this area would suggest that some kind of dollar panic is building.
On Wednesday, USD/JPY initially joined the broader dollar rebound and the pair reached an intraday high in the 96.40 area during the morning session in Europe. However, the pair could not hold on to its gains (spill-over effects from the decline in EUR/JPY) and settled in a range between 95.60 and 96.00 later in the session. In this respect, the pair to some extent again decoupled from the global dollar price ac-tion. USD/JPY closed session at 95.99, not that far away from the 95.76 close on Tuesday.
Overnight, the dollar correction/rebound continued with USD/JPY returning above the 96 mark. Asian stocks are broadly lower in step with the US, but especially for the Japanese indices the losses should be considered as limited. Japanese Q1 capi-tal spending data showed again a steep Y/Y decline, but the figure shouldn’t come as a surprise anymore.
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’ be-tween 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 impor-tant 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-on-dips approach as long as the bottom of the range 94.40/93.50 area holds. A break above the 97.23 reaction high would further improve the ST picture.
On Wednesday, sterling initially still tried to extend its rally against the euro. How-ever, the global environment was not really supportive for currencies with a higher risk profile, but the eco data still came out sterling supportive. Consumer confidence improved quicker than expected and the services PMI even rebounded above the 50 boom-or-bust level. Especially the latter is a highly symbolic factor. However, during the day gradually some sterling selling kicked in. In this respect, the political turmoil in the UK was also a good reason to lock in some profits on the steep sterling gains of late. EUR/GBP closed the session at 0.8679, compared to 0.8629 on Tuesday evening
Today, the BoE holds its monthly policy meeting. We don’t expected any new en-gagements with respect to the policy of asset purchases as the BoE still has enough room available to continue its purchase over the next month (or even tow months).
Recently, we were a bit surprised by the force of the rebound in sterling. In a long-term perspective sterling is probably undervalued against the euro, but we consid-ered 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 couldn’t do anything else but drawing conclusions as EUR/GBP fell below the key 0.8637 level. This move forced us to leave our long-standing buy-on-dips approach and turn to a more neutral approach vis-à-vis the UK currency. We don’t expect a swift and forceful break lower EUR/GBP. Nevertheless, the break below the key support level is an important signal that something has really changed in market sentiment towards the UK currency. Yesterday’s correction doesn’t change this assessment. For now we keep a wait and see approach and in particular we look out whether the political uncertainty will have a more lasting im-pact on sterling trading. Short-term we expect some consolidation in the 0.8576/0.9000 range.
