On Thursday, trading in EUR/USD initially was locked in a narrow sideways trading pattern. The dollar made some progress in the wake of the FOMC statement (no additional steps in QE) and the US currency managed to hold on to these gains in Asia and early in Europe. The eco data in Europe and in the US were mixed to slightly weaker than expected, but they had hardly any impact on currency trading. Initially, stock markets also failed to give EUR/USD trading a clear direction. The difference in sentiment between Asia (decent gains) and Europe (substantial losses) temporary broke the ‘usual’ link between stocks and EUR/USD. The rather sharp decline in European money market yields after the massive liquidity injection via the 1-year ECB tender on Wednesday might have been a (slightly) negative factor for the single currency. However, the tide turned as US stocks performed quite a powerful rebound later in the session. This time, EUR/USD joined the move and pair closed the session at 1.3988, compared to 1.3930 on Wednesday evening.
Today the European eco calendar contains the German CPI data. In the US, investors will watch out for the May personal income and spending data and the final Michigan consumer confidence release. The German Y/Y inflation reading is expected to fall into negative territory. However, we don’t think that this should have a lasting impact on the currency market. The US data have more market-moving potential. Markets now are looking for ‘hard’ data indicating that the economy has reached the bottom. In this context the spending and income data might get some market attention. The impact on EUR/USD trading, if any, most probably will again go via the reaction on the stock markets.
Global context. During the month of May, market sentiment was dollar negative and the euro profited 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 strong enough to support this thesis. At this week’s FOMC meeting, the Fed didn’t bring any insights on new/additional policy steps. So, until now, there are no indications that the Fed policy will turn more dollar supportive anytime soon. Recently, the ECB side of the story was not really that important for the price action on the currency markets in general and for EUR/USD in particular. However, recent signals from Mr. Weber that the ECB measures don’t filter through enough into bank lending might over time suggest that the ECB will have to take ‘other’ steps. This debate is still in its very early stages but it deserves the attention, also from a currency market point of view. The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. We’re not that far yet, but…
For now, EUR/USD traders mostly continue 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 and the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. The pair returning above MTMA and above the previous shortterm 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. This is not our favorite scenario.
On Thursday, the global picture for USD/JPY didn’t change. However, the intraday price action was a bit remarkable. The pair ‘logically’ moved higher in Asian trading, supported by a positive stock market environment in the region. It lost some ground in Europe but declined further during the US trading hours, despite the steep rebound on the US stock markets. We didn’t see any specific reason for this move except for the decline in US bond yields (after a successful 7-year bond auction). Nevertheless, yesterday’s price developments were again perfectly within the established trading ranges. USD/JPY closed the session at 95.95 (compared to 95.66 on Wednesday).
Overnight, Japanese eco data were mixed with the (Tokyo) CPI figures moving deeper into negative territory than expected. These data suggest ongoing weakness in final demand. The April all industry activity index was slightly better than expected. Asian stocks trade mostly higher and this gives USD/JPY downside protection.
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 Thursday, sterling came again under pressure even as there were no important eco data on the calendar in the UK. Of course, the steep rise of the UK currency against the euro on Wednesday morning was a bit ‘strange’, too. Sterling held on to these gains after the Testimony of BoE’s King and some other central bank members before a Parliamentary Committee on Wednesday evening. However, yesterday in the UK financial press, there were quite some headlines on a rift between the BoE and the government on several policy issues, including regulatory reforms. The BoE governor also sounded rather skeptical on the path that the government has set out to fix government finances. Whatever the reason, sterling came under pressure from the start of trading in Europe and tested offers in the 0.8575 area around noon. Cable was hit even harder as it lost two big figures. The improvement in global investor sentiment during the US trading hours helped the UK currency to recoup some of the early losses. EUR/GBP closed the session at 0.8546, compared to 0.8490.
Today, there are no important eco data in the UK. In its financial stability report (published overnight) the BoE said that pressures on major banks have stabilized but the system remains vulnerable to more shocks, including growth setbacks.
Over the previous weeks, 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 was losing 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 rather resilient until now. Regaining the 0.8605 area (last week high) would call off the ST alert in EUR/GBP and would be an indication that the EUR/GBP rebound could have some further to go.
