On Wednesday, trading in the EUR/USD currency pair showed two different faces. In Asia and early in Europe, EUR/USD was well supported as decent gains on the stock markets supported the single currency. Comments from the Russian central bank that it intends to reduce the share of Treasuries in its reserves also kept the dollar under pressure. EUR/USD revisited intra-day highs in the 1.4140 area at the start of trading in the US. However, the tide turned later in the session. US stock markets failed to join the rally in Asian and Europe and, as the dollar is still sensitive to swings in global risk appetite, the US currency started quite an impressive rebound. The US trade balance figures were close to expectations, but the flow data on imports and exports were disappointing. Later in the session the focus shifted to the Beige book and to the 10-year Treasury auction. Especially the latter drew some market attention. 10-year yields spiked (temporary) higher after the auction results and even came close to the 4% barrier. From a dollar point of view, this is a mixed signal, but apparently the rising yield differential between US and German bonds attracted some buying interest in US bonds later in the session. Treasuries recouped some of their losses and the dollar gained some further ground. Of course, a disappointing stock market reaction to the auction result might have played a role, too. The Beige book painted a mixed picture on the US economy, but was far from euphoric. EUR/USD closed the session at 1.3984, compared to 1.4065 on Tuesday evening.
Today, US calendar contains the retail sales, the claims and the Business inventories. We take especially a close look at the retail sales. Last month, the release disappointed. However, after the payrolls, markets will be looking for other ‘hard’ evidence of improvement. A strong figure could fuel speculation that the US economy taking the lead in the recovery (at least compared to the euro zone). Recently, the currency reaction to (US) data most often went through the reaction on the equity markets. However, we’re no longer convinced that this pattern will hold. After the market reaction to the payrolls, we wouldn’t be surprised the see the dollar gaining on strong US eco data as they may fuel speculation that the Fed might raise rates sooner than expected. Later in the session there is again an important 30-year Treasury auction. It is still early days, but yesterday, there were some tentative signs that higher US yields might attract some cautious USD buying interest. It will be interesting to see whether this trading pattern could become more broad-based.
Over the previous weeks, market sentiment was dollar negative and the euro took profit from improved global risk appetite. On top of that, there was a lot of uncertainty whether the Fed will raise its program of asset purchases (including Treasuries) and markets grew also more concerned about the fiscal situation in the US. Earlier this week, we suggested that something might have changed since last week’s payrolls report, as markets might shift their attention to the pace of the recovery in the US and its potential impact on the Fed policy. Earlier this week, the dollar failed to developed a clear trading pattern and the long-standing trading pattern that positive investor sentiment (as mirrored in stocks and even more in commodities) weighed on the dollar and supported the higher yielding currencies and the euro, still played some role. Nevertheless, we stay alert as to whether the dollar indeed might become more sensitive to positive US eco data.
Until last week we had a euro positive/dollar negative bias. After last Friday’s payrolls report and the rise in short-term US interest rates, we changed our EUR/USD bias from positive to neutral. For now, we hold on to that view.
Looking at the technical charts, the medium term outlook remains euro constructive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). There was a forceful correction on Friday and on Monday, but moved stalled before testing the key 1.3793 (reaction low)/1.3739 (previous reaction high) support area. Nevertheless, we still have the impression that the topside in EUR/USD is becoming more difficult. For now, we expect some consolidation in the 1.3739/1.4338 trading range. A break below this range bottom could be an indication that the ST USD sentiment is improving.
On Wednesday, USD/JPY decoupled somewhat from the price action in other dollar cross rates. The pair posted a steady rise throughout the session. Initially the pair was supported by the strong stock market performance. It hardly reacted to the Russian comments that it intended to reduce Treasury holdings in favour of IMF bonds but rejoined the broader dollar rebound later in the session. USD/JPY closed the session at 98.12, compared to 97.38 on Monday.
Overnight, Asian stock markets again moved (cautiously) higher despite the disappointing performance in the US, yesterday evening. The nikkei moved even temporary above the psychological level of 10.000. The Q1 Japanese GDP figure was revised up marginally from -4.0% to -3.8%. USD/JPY trades marginally lower compared to yesterday’s close.
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, even as the dollar losses in this cross rates were rather limited. USD/JPY came close to the key 93.54 range bottom, but a break didn’t occur. Friday’s jump in the dollar also propelled USD/JPY higher in the medium term trading range. Higher short-term US interest rates could also be a support for the dollar against the yen. The price action earlier this week really USD supportive, but we maintain a buy-on-dips approach in this pair. A break above the 99.80 May high might open the way for a retest of the 101.44 range top.
On Wednesday, sterling continued its ascent against the euro. The trading pattern was similar to the previous sessions. In the dollar cross rates, cable continues to outperform EUR/USD, pushing EUR/GBP south. The UK production data were marginally better than expected and might have supported the sterling positive sentiment. However, the decline in EUR/GBP only occurred in the afternoon. At the same time, the market ignored poor UK trade balance figures. This suggests that the flows (both in cable and in EUR/GBP) are very much order driven. Nevertheless, markets obviously tend to think that the worst for the UK economy might be behind us. EUR/GBP closed the session at 0.8550, compared to 0.8627.
Today, the UK eco calendar is almost empty.
Recently, we were a bit surprised by the force of the rebound in sterling. In a longterm perspective sterling is probably undervalued against the euro, 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. 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 longstanding 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. Nevertheless, the break below this key support level is an important signal/confirmation that something is changing in market sentiment towards the UK currency. The pair settling a now ST reaction low only reinforces this feeling. Some consolidation after the recent sterling gains should not come as a surprise. However, short-term players might maintain a sell-on-upticks approach. The pair needs to regain the 0.8867 reaction high to concluded that something is changing for the better.
