On Thursday, EUR/USD held an almost perfect sideways trading range between 1.3900 and 1.4000, at least during the European trading hours. There were no important eco data in Europe. Watching the stock markets was again the name of the game for EUR/USD traders. A dip of the European stock markets early in the session brought EUR/USD to the bottom of the mentioned trading range. Sentiment on the stock markets improved later in the session. The better than expected Philly Fed survey pushed stocks higher and EUR/USD tested offers in the 1.40 area. However, there was no follow through price action. EUR/USD gradually had to cede its initial gains and the move even accelerated later in the session despite stocks holding up rather well. The pair dropped temporary below the 1.39 mark. At the same time US yields were captured in a strong upmove. Of course, this was only an intraday move, but the pattern of the dollar gaining against the euro in step higher US yields and a positive stock market performance is interesting. We don’t draw strong conclusions on this individual move yet, but it deserves some attention. Are markets again (as was the case after the payrolls) contemplating a scenario of the US taking the lead on the way to the recovery and might this finally give the dollar some support? EUR/USD closed the session at 1.3900, compared to 1.3942 on Wednesday.
Today to eco calendar is almost empty on both sides of the Atlantic. So, technical factors and the performance of the stock markets will again be the most evident factors for trading. On top of that, (currency) investors will start to look forward to next week’s Fed meeting. The key questions to be solved are: will the Fed give any indications whether it intends to expand its program of QE/asset purchases and/or will they already prepare the monetary exist strategy? Especially the market reaction at the short end of the US yield curve could be important for the dollar.
During the month of May, 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 mostly were not really strong enough to support this thesis and the Fed strategy remains subject to a high degree of uncertainty. An early rate hike is far from a done thing. Nevertheless, as was again illustrated by yesterday’s price action, markets still ponder this option incase of stronger than expected US data. At least until now, uncertainty on those items remained too high and the dollar failed to develop a clear (positive) trend. This uncertainty will continue hang over the market ahead of next week’s Fed meeting. 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. Last week, 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). After the payrolls, quite a forceful correction occurred, but a test of this key 1.3739 level didn’t occur. Nevertheless, the picture in EUR/USD is becoming heavier. In a day-today perspective we had a sell-on upticks approach and we hold on to that bias. A sustained rebound above the 1.4012/1.3983 area (Boll Midline/MTMA) would make the short-term picture neutral again.
On Thursday, the recent dollar correction ran out of steam. Later in the session USD//JPY even installed a gradual uptrend. Better than expected US data, a constructive/ improving sentiment on the stock markets and a rise in US (short-term) yields were all good reasons for the pair to go north. USD/JPY closed the session at 96.47, compared to 95.75 on Wednesday evening.
Overnight, Asian stock markets joined yesterday’s rebound in the US. Japanese department store sales still painted a grim picture on spending but had no impact on trading.
Global context. Since March, 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. At the end of May, USD/JPY came relatively close to the key 93.54 range bottom, but a real test/break didn’t occur and USD/JPY returned higher in the medium term trading range. Last week, the rebound ran into resistance ahead of the first resistance area (the early May highs). Yesterday’s rebound might be an indication that the ST correction in this pair has run its course. Nevertheless, any additional USD/JPY gains will remain subject to global market sentiment. In a longer term perspective, this remains a range trading story. We expect the range bottom (MT reaction lows at 93.86/93.54) to hold.
On Thursday, sterling initially extended the correction that started on Tuesday. This time, the move was supported by the UK eco data as the May retail sales came out materially weaker than expected. EUR/GBP jumped from the 0.8500 area to test offers in the 0.8600 area. The CBI June industrial trends showed a moderate improvement, but this release had no noticeable impact on sterling trading. Nevertheless, later in the session sterling performed quite a remarkable comeback and late in the session the EUR/GBP even revised the intraday lows just below 0.8500. So, the sterling rally against the euro stalled, but after all sterling held up remarkably well.
Today, the UK eco calendar is empty.
Recently, we were a bit 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.
Since Wednesday, there were first tentative signs that the sterling ascent might lose momentum. Over the previous days we indicated that we thought that enough good news for sterling had been priced in at the current levels and advocated profit taking on ST EUR/GBP shorts. We hold on to this tactics, even if we have to amid the sterling showed remarkable resilience yesterday. The pair regaining the MTMA (today at 0.8572) would be an indication that the sterling rebound has run its course for now.
