On Tuesday, the EUR/USD cross rate showed a remarkably strong performance as the pair regained the 1.40 barrier. So, the pair more than recouped the losses of Monday’s global sell-off. There was no obvious reason to explain the move. The European data (PMI’s) were mixed and the rebound on the stock market hardly can be seen as the reason behind the move. Uncertainty ahead of today’s Fed meeting most probably played a role. ECB’s Weber indicating that the ECB had used the room for rate cuts and that ‘further steps are currently not needed’ might have given the euro some support, too. Nevertheless, the move was most probably order-driven. EUR/USD closed the session at 1.4077 compared to 1.3865 on Monday.
Today the European eco calendar contains only some second tier releases. After the downgrade of the Word Bank economic outlook for 2009 and 2010 earlier this week, the OECD will publish its updated forecast. Another negative surprise might further deteriorate global investor sentiment. In the US, the durable orders and the new home sales are scheduled for release. These are interesting data from an economic point of view, but any market reaction to those releases will probably be guarded as traders will focus on the outcome of the FOMC meeting. With respect to the latter, we don’t expect the Fed to herald any profound changes to the execution of its monetary policy of quantitative easing. The Fed will continue its program of asset purchases as set out over the previous meetings. Investors recently gave quite some attention to the potential exit strategy. In this respect the Fed will have to strike a difficult balance. They shouldn’t take away the stimulus too early but they will also have to prevent longer term inflation expectations creeping into market due to printing money for too long without a credible exist strategy. After the payrolls, it looked as if there was some change of the Fed preparing markets that it could consider an early rate hike in order to counterbalance the potential risks of the quantitative easing/ asset purchases. However, recent talk from Fed speakers and the indications from the Beige Book suggest that it is probably too early to already play this card. As such, this might be a slightly negative factor for the US dollar. However, looking at yesterday’s price action, markets apparently already take into account such a soft scenario. We also take a look whether the outcome of the ECB 1-year tender (high demand is expected) will have any negative impact on the euro. Yesterday’s price action suggests that the impact on the currency remains limited for now.
Global context. 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 the Fed policy and about the fiscal situation in the US. After the payrolls, it temporary 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 hard 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. At least until now, uncertainty on those items remained too high and the dollar failed to develop a clear (positive) trend. Today’s Fed meeting might give some hints on this item, but probably it is too early to expect the Fed to announce any specific measures on how to unwind monetary policy stimulus. 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. Over the previous two weeks, we had a neutral bias for EUR/USD (from positive). 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 level didn’t occur. Over the previous two weeks, the short-term picture in EUR/USD had become a bit heavier/toppish. However, yesterday’s rebound above to MTMA and the previous short-term highs (1.4013/33) made the short-term picture again neutral. A break above the 1.4178 reaction high would open the way for a retest of the range to at 1.4338. We expect this level to be difficult to break short-term. A break above the 1.45 area, would suggest the risk for a more profound loss of confidence in the US dollar and could even lead to dollar panic. However, such e scenario is even not in the advantage of the US.
On Tuesday, USD/JPY made some intraday swings of almost one yen. After the yen gained on the stock market decline in Asia, the pair recouped the early losses as tensions eased during the European trading hours. The pair even returned to the high 95-area at the start of the US trading session. However, global dollar weakness (ahead of the Fed?) this time also affected the USD/JPY cross rate. The pair closed the session at 95.22 compared to 95.87.
Overnight, Asian stock markets mostly are in positive territory and this triggers some profit taking on the recent yen rally. The Japanese trade balance came out slightly better than expected but the steep declines in both exports and imports suggest that a sustained rebound in external demand is not around the corner yet.
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. Nevertheless, at times of rising market stress, this market theme still plays its role. 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. The subsequent rebound ran into resistance ahead of the first resistance area (the early May highs). In a day-to-day perspective, watching the stock markets remains the name of the game. In a longer term perspective, this remains a range trading story. We expect the range bottom (MT reaction lows at 93.85/93.55) to hold.
On Tuesday, sterling faced quite some heavy selling pressure. EUR/GBP was already off the Monday lows at the start of trading in European and the correction accelerated during the session. The sterling losses were reinforced by comments from BoE’s Dale. Addressing issues on the execution of the QE policy he said that Gilt purchases of foreigners could have a beneficial impact through the channel of a lower exchange rate for the British pound. This reinforced the feeling that the BoE is not unhappy with a weak pound. One could also read this view between the lines of the Minutes of the previous MPC meeting. So, sterling was sold as soon as the headlines of Mr. Dale hit the screens and EUR/GBP set in intraday highs just below the 08600 mark. The pair closed the session at 0.8556 compared to 0.8482 on Monday evening.
Today, the CBI industrial trades are scheduled for release. Any indication that final demand might not rebound as swiftly as hoped after the recent eco data might become an excuse for some further profit taking on the sterling rally. However, even more important for markets will be the testimony of BOE’s King and some other CB members on the inflation report and on the banking crisis. Any hints that the bank might extend its asset purchasing program and/or any comments on the potential negative impact of the rise of sterling could be a good reason to take further profit on the recent sterling rally. Recently, we were a bit surprised
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. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in investor sentiment towards the UK currency. This move forced us to leave our longstanding buy-on-dips approach. We turned to a neutral approach vis-à-vis the UK currency.
Since mid last week, there were tentative signs that the sterling ascent might lose momentum. Recently, we indicated 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 at the end of last week and even on Monday. However, yesterday’s rebound suggests that some bottoming out in EUR/GBP might indeed be under way Regaining the 0.8605 area (last week high) would call off the ST alert in EUR/GBP and would be an indication that the sterling rebound has run its course for now.
