On Thursday, EUR/USD trading basically kept a sideways trading pattern. There were some intraday swings, but after all the changes at the end of the day were rather limited. There was again a decent intraday correlation between EUR/USD and the stock markets. The pair tried to regain some of Wednesday’s losses early in the session. But as the stock market momentum waned going into the US trading ses-sion, EUR/USD dropped from levels around 1.4250 early in European trading to be-low the 1.41. Some euro reluctance ahead of the ECB press conference might have played a role, too. At the press conference Mr. Trichet didn’t bring much new info for the (currency) market. In the Q&A session, Mr. Trichet said that was very important that the US authorities considered a strong dollar to be in the interest of the US. However, this was also no high profile news for the currency market. Later in the session, EUR/USD recouped most of the intra-day losses, supported by a decent performance of the US stock markets. The eco data were few and had hardly any impact on trading. EUR/USD closed the session at 1.4183 compared to 1.4162 on Wednesday evening.
Today, there is only one big issue on the eco calendar: the US payrolls report. The market consensus expects a slight the decline in the job losses from -539 to -520 in May. Evidence from other indicators including the ADP labour market report recently also suggested that is probably a bit too early to already expect a material decline in the tempo of job losses. Any currency market reaction to this figure will probably go via the reaction on the stock markets.
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. With respect to the stock market performance, the least one can say is that downward corrections, if any, were very short-lived until now. In a longer term perspective, uncertainty on the results/side effects of the ag-gressive 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 US currency. 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. However, as this is a dollar problem, Trichet during yesterday’s press con-ference only referred to the US attitude with respect to this issue. This only supports the view that one should not expect any ECB policy steps to address this ‘dollar issue’ anytime soon. If it would really become an item over time it should be ad-dressed in the context of the G8/G20. However, we’re not that far yet.
Also interesting to see, earlier this year tensions in Central Europe often also had some negative impact on the single currency. Alt least for now the uncertainty on sustainability of the currency peg in Latvia has no noticeable impact on the euro.
Looking at the technical charts, the outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). The break above the in-termediate high at 1.4051 only confirmed 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. The ST momentum stays euro positive as long as the pair holds above the MTMA (today at 1.4043). 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 Thursday, USD/JPY was well bid in Asia and early in Europe. The correlation be-tween USD/JPY and the stock markets was far from one-to-one, but the ongoing constructive global investor sentiment gave the pair downside protection. So, after a brief (order driven) dip early in US trading, the pair resumed its gradual rebound and closed the session at 96.58, compared to a 95.99 close on Wednesday.
Overnight, there were no high profile eco data in Japan. Asians stocks are cautiously higher. USD/JPY is traded a few ticks higher compared to yesterday’s closing levels. There were some market rumours that the BOJ was considering upgrading its view on the economy this month (turning less negative) on improvement in exports and output.
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 continue to 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 Thursday, there was quite a remarkable swing in sterling sentiment. Early in Europe, sterling was still well bid and even tried to reverse the correction that devel-oped late on Wednesday and yesterday morning in Asia. The BoE, as expected, didn’t bring any new info on the execution of its monetary policy. However, around 14.00 CET EUR/GBP spiked higher by more then one big figure. At that time there appeared market rumours on UK PM Brown preparing for resignation. Those ru-mours were soon denied, but the damage for sterling was done. At the same time there were also rumours on the execution of a big USD buying order with sterling one of the major counter-currencies. The spectacular spike higher is also an indica-tion that liquidity in the sterling market is rather limited. The least one can say is that the political turmoil in the UK has become an item of importance for the currency market. Sterling extended its decline later throughout the sessions. EUR/GBP fin-ished the session at 0.8768, compared to 0.8679 on Wednesday.
Today, the UK eco calendar only contains the UK PPI data. They should not really be a big issue for the currency market. The short-term market focus in the UK will continue to be on the fate of UK Prime Minister Brown. The resignation of pension Minister Purnell and his call for PM Brown to step down only added to the political uncertainty. The improving UK eco data of late apparently are no longer an issue anymore, at last no in the short-term.
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 in EUR/GBP. Neverthe-less, the (albeit temporary) break below this key support level is an important sig-nal/confirmation that something is changing in market sentiment towards the UK cur-rency. Over the previous two days the sterling picture was again clouded by the po-litical turmoil. However, this doesn’t change the global assessment. It is just a good reason to take some profit on recent sterling gains. For now we keep a neutral, wait and see approach and look out whether the political uncertainty will have a more lasting impact on sterling trading. Short-term we expect some consolidation in the 0.8576/0.9000 range. In a day-to-day perspective, the risk is obviously for EUR/GBP to move higher in this range.
