On Friday, most markets were in a corrective mode and this was also the case for EUR/USD trading. During most of last week, the pair was supported by fairly positive global market sentiment. However, the rally on stock and on commodity markets ran out of steam. This triggered a scaling down of dollar shorts against the commodity currencies, but also against the euro. Poor European production data added to the euro negative sentiment. EUR/USD dropped to the 1.3950 area early in US trading. The Michigan consumer confidence release was slightly higher compared to the previous month but failed to impress investors. US stock markets failed to find a clear trend and EUR/USD settled in the 1.40 area going into the end of the week. The pair closed the session at 1.4016, compared to 1.4108 on Thursday.
Today, the eco calendar is thin. In the US, the Empire manufacturing survey and the tic capital flow data will be published. Markets will also take a look at speeches from several Fed and ECB members.
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. After the payrolls, it looked as if markets might have shifted their attention to the pace of the recovery in the US and its potential impact on the Fed policy. However until now, other data were not really strong enough to support this thesis and also the Fed strategy remains subject to a high degree of uncertainty. Do they really consider an early rate hike? While they still expand the program asset buying? So, at least until now, uncertainty on those items remained too high and the dollar failed to develop a clear (positive) trend. In this context, EUR/USD traders continued to watch investor sentiment (as mirrored in stocks and even more in commodities) as an important guide for EUR/USD trading. Nevertheless, we stay alert as to whether the dollar indeed might become more sensitive to positive US eco data.
After the US payrolls report and the raise in short-term US interest rates, we changed our EUR/USD bias from positive to neutral. For now, we hold on to that view. If the correction on the stock markets would go somewhat further, the dollar might gain some more ground against the single currency. However, in line with a lot of other markets (Stocks, LT yields), we have the impression that EUR/USD pair has entered a ST consolidation phase.
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). After the payrolls quite a forceful correction occurred, but the move 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 continue to prefer a sell-on-upticks approach.
On Friday, the global rebound in the US dollar was also visible in the USD/JPY cross rate. The pair started trading in Asia in the 97.50 area and performed a gradual rebound throughout the session. Remarkably, the rebound continued even as sentiment on the European and the US stock markets was far less positive compared to sentiment in Asia (and especially in Japan). The correction on global commodity markets might be an explanation for this global dollar outperformance. USD/JPY closed the session at 98.43, compared to 97.63 on Thursday.
Overnight, Asian/Japanese stock markets are also in a corrective mode. At the G8 meeting, the finance ministers changed ideas on the fiscal and monetary exit strategies. However, they have to walk a thin line between preventing inflation expectations to spill into the market on the one hand, and being too early and taking the risk of derailing the recovery on the other hand. So, the meeting didn’t bring any hard news for the (currency) market. The statement didn’t contain any reference to the US dollar (the central bankers didn’t attend the meeting). Some dollar supportive news came from the Russian Finance Minister as he said that the dollar’s role as the world’s main reserve is unlikely change in the near future.
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 and USD/JPY returned higher in the medium term trading range. Higher short-term US interest rates could also be a support for the dollar against the yen. Last week, trading in this pair was rather indecisive, but the downside looks rather well protected. So, 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.
