On Thursday, EUR/USD again mirrored the swings in global investor sentiment. There were some cautious gains in Europe, but investors become a bit more cautious ahead of the US retail sales release. EUR/USD set an intraday low in the 1.3950 area just before the release of the figure. The report was close to expectations. However global markets apparently were happy that there was no negative surprise. Stocks and EUR/USD went higher after the release. The ongoing rise in commodity prices was a negative factor for the US currency, too. Later in the session, the US 30-year auction didn’t go extremely well, but investors were relieved as soon as it was out of the way. This supported global sentiment and EUR/USD reached intraday highs above the 1.4150 mark. At the end of the day, some profittaking kicked on the US stock markets and this brought EUR/USD off from the highs. The pair closed the session at 1.4108, compared to 1.3984.
Today, the European industrial production data for the month of April will be published. They are rather outdated and therefor no market mover. In the US, the Michigan consumer confidence has market moving potential. Markets will be keen to see whether the improvement from the previous two months can be extended. Investors will also keep an eye on the headlines coming from the G8 meeting in Venice. The G8 leaders will make a first evaluation of the measures that were put in place to address the financial and economic crisis. They will also discuss potential exit strategies. The FX markets probably will not be a major topic. At best, some participants will repeat that currency volatility is a negative factor for the global economy. Markets will also take a look whether Russia will make new declarations on management of its currency reserves after earlier statements that they are considering to reduce the portion of Treasury holdings.
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. However, at least until now the dollar failed to develop a clear (positive) trend. 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 its 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. In a day-to-day perspective we prefer a sell-on-upticks approach.
On Thursday, USD/JPY was again traded more or less in step with other USD-cross rates. USD/JPY reached an intraday high in the 98.50 area just before the publication of the US retail sales. It was a bit surprising to see the yen gaining/dollar losing so much ground once those (marginally better) US data were out of the way. The steep rise in commodity prices probably was a factor in this (USD negative) move. USD/JPY closed the session at 97.63, compared to 98.12 on Wednesday evening.
Overnight, Asian/Japanese stock markets extended their well-established uptrend. The Nikkei broke the level of 10.000. Japanese eco data this morning (Final industrial production and consumer confidence) came out (slightly) better than expected. In an interview, the Japanese Finance Minister expressed its confidence in the US strong dollar policy and in US Treasuries.
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 in this pair earlier this week was rather indecisive, but we maintain a buy-on-dips approach. A break above the 99.80 May high might open the way for a retest of the 101.44 range top.
On Thursday, sterling continued to do what it did during the previous days: it continued its rebound against the euro and the dollar. Recently, some eco data confirmed the market feeling that the UK economy might have hit the bottom and there is even some hope that the recovery might start sooner than expected. BoE’s sentence in a speech also indicated that he expected the economy to return to growth either later this year or early 2010. So, the news flow remained sterling supportive. EUR/GBP closed the session at 0.8504, compared to 0.8550 on Wednesday evening.
Today, the UK eco calendar is again 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. However, 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-ondips approach. We turn to a 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 has changed in market sentiment towards the UK currency. The pair setting new ST reaction lows 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. He pair regaining the MTMA (today at 0.8646) would be an indication that the sterling rebound is losing power.
