On Tuesday, the correction in EUR/USD that developed on Friday and on Monday stalled. As was the case recently, the move was primarily driven by the price action on the stock markets. After a steep decline in the US on Monday, (European) stock markets held up remarkably well and this also supported the euro against the dollar. The better than expected ZEW supported global investor sentiment and the same was true for the US housing data. So, EUR/USD initially reversed part of Monday’s losses. However, US stocks failed to maintain the early gains and this dragged the EUR/USD pair again lower after the European close. EUR/USD closed the session at 1.3837, compared to 1.3803 Monday.
Markets also kept an eye on the headlines from the BRIC meeting in Russia. Russia apparently took the lead in a debate to expand the basket of special drawing rights to include other (emerging markets’) currencies and for the SDR to play a bigger role in the reserve management of central banks worldwide. The BRIC communiqué called for ‘a stable, predictable and more diversified international monetary system’. However, the dollar was not openly attacked. Over time, the outcome of this debate will be important for the fate of the USD dollar. However, in a day-to-day perspective, the impact on the dollar was fairly limited. Of course, no one of the parties involved has any interest in stetting up a strategy that might push the dollar of a cliff. The swings on the stock markets obviously played a more important role than this fundamental issue.
Today, the US eco calendar contains CPI and the current account for Q1. We don’t expect those data to have a lasting impact on currency trading. The same applied to the European trade balance data. Stocks and global market sentiment probably will continue to be the dominant factor for EUR/USD trading.
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 still quite some uncertainty about next steps in de Fed policy and about the fiscal situation in the US. After the payrolls, it looked as if markets might shift 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? Will they still expand the program of 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 in commodities) as the most 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. In a longer term perspective, a credible Fed exist strategy would ease the pressure on the US currency. Next week’s Fed meeting might be a next milestone in this debate.
Last week, 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.
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 the first support at 1.3793 (reaction low). This level was temporary broken earlier this week but the key 1.3739 (previous reaction high) support area was not really challenged, yet. Nevertheless, the picture in EUR/USD is becoming heavier. In a day-to-day perspective we had a sell-on upticks approach. We hold on to that bias. A sustained rebound above the MTMA (today at 1.4028) would make the short-term picture neutral again.
On Monday, the dollar lost quite some ground against the yen, but the pair already reached its intraday low at the start of trading in Europe. Later in the session, also for this pair, stock market watching was the name of the game. The slide on the US stock markets at the end of the day also caused USD/JPY to close the day near the session lows at 96.38 (compared to 97.84 on Monday evening).
Overnight, Asian/Japanese stocks are mixed. Japanese indices again outperform the rest of Asia on hopes the Japanese economy might post a better performance in Q2 after the steep decline in Q1. There were no market moving eco data this morning. USD/JPY is traded a few ticks higher 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 and USD/JPY returned higher in the medium term trading range. Last week, trading in this pair was rather indecisive, but the downside looks rather well protected. However, yesterday’s break below the 97.08 neckline suggests that the short-term momentum in his pair deteriorated. So, the yen might gain some further ground as long as the global stock market correction persists. Nevertheless, we expect the range bottom (93.86) to hold. Basically, this remains a range-trading story.
On Tuesday morning it looked as if sterling was to enter calmer waters after the recent rally (against the euro). EUR/GBP tried to move off from the Monday’s lows and settled in the 0.8480 area early in European trading. However, the publication of the UK CPI figures gave the UK currency again a shot in the arm. UK inflation (both core and headline) came out above the market consensus. We are a bit surprised to see the currency market reacting to CPI data in such a way. However, markets apparently saw this figure confirming the recent trend of improving UK eco data. The UK CPI (2.2%) thus remains above the 2.0% BoE inflation target level, but we don’t expect this data release to have any big impact on the BoE policy going forward. Nevertheless, sterling traders still saw this release as a good reason to add to sterling long position. EUR/GBP set a new multi-month low in the 0.8435 area and held close to this level further out in the session. The pair closed session at 0.8431, even slightly lower compared to the 0.8457 close on Monday.
Today, the UK eco calendar contains the Labour market data and Minutes from the previous bank of England meeting. With respect to the job data, the question is whether they are able to confirm the recent positive less negative UK eco news flow. In the Minutes markets will look for clues on the possible next steps in the BoE’s QE easing. Will they hint to a higher amount of asset purchases (beyond the £150B threshold)? If so, this could hamper the recent rebound of the UK currency.
Recently, we were a surprised by the force of the 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, improving eco data were a good reason for investors to turn sterling positive. 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. We turned 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 reinforced this feeling. There is no reason to fight the established downtrend yet, but we tend to think that enough good news for sterling is priced in at the current levels. Recently, we had a ST sell-on-upticks approach in this pair. ST players might consider profit taking on the recent sterling rally. The pair regaining the MTMA (today at 0.8585) would be an indication that the sterling rebound has run its course for now.
