On Friday, trading in the EUR/USD currency pair lacked any clear direction and developed in a rather tight sideways trading pattern. In Europe there were no key data. On top of that there was no guidance for trading from the US as US markets were closed. EUR/USD ended a dull trading session at 1.3980, little changed from the 1.4003 close on Thursday morning. Nevertheless, investors were still rather cautious on the prospects for the global economy after the weaker than expected US payrolls report on Thursday. (European) stocks were not able the recoup part of Thursday’s steep losses and this also prevented EUR/USD to regain the 1.40 area in a sustainable way.
Today, the eco calendar is again rather thin with only the US ISM non-manufacturing scheduled for release. Later this week global markets will probably focus on a heavy US auction calendar. From a currency point of view, the economic newswires will give a lot of attention to the G8 meeting that will be held in Italy on July 08 -10. Already for quiet some time, several emerging market countries including Russia and China are trying to open a discussion on the dollar’s role as reserve currency. This issue might also be brought forward at a joined meeting of the G8 with five emerging market countries. From the G8, one shouldn’t expect a big U-turn on this item, if as there is also quite some unease in Europe on the strength of the euro/the weakness of the dollar. The call from some emerging market countries to reduce the importance of the dollar as reserve currency is at least a bit ambiguous as they are among the biggest holders of USD reserve (Some even added to their dollar assets in the recent past). The headlines on this G8 meeting might create some dollar nervousness, but we don’t expect this to become a ‘big issue’ anytime soon. Global investor sentiment will probably remain the main driver for EUR/USD trading. In this respect, we have the impression that markets are not really that confident going into the earnings’ season that will start at the end of this week/early next week.
Global context. During the month of June, EUR/USD basically kept a sideways trading pattern. The May euro rally stalled as global investors turned again more cautious on the strength of a potential economic recovery. This lower risk appetite capped the ascent in EUR/USD. However, the dollar was also not able to take the lead either. After all, the correction on the stock markets was rather muted. On top of that, any hopes that the Fed would raise rates rather soon proved not justified and from time to time the debate on the status of the dollar as reserve currency resurfaced, causing temporary set-backs for the US currency. Regarding the European side of the story, we recently took notice of the fact that some ECB members had become more concerned that the ECB measures didn’t filter through enough into bank lending (cf supra). The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. However, at least for now, ECB’s Trichet didn’t give any signals that the ECB is preparing any additional unconventional policy steps to address this issue.
So, this left the global picture for EUR/USD trading rather neutral and indecisive. None of those themes is currently able to set the tone for EUR/USD trading. So, the easiest option for EUR/USD traders remains to watch global investor sentiment and track the swings on the stock markets.
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). Last month the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. Last week, the pair moved closer to the top of this range, but a real test of the 1.4338 didn’t occur. Recently, we advocated that break of this area would be difficult and maintained a sell-on-upticks approach. We hold on to that bias. More stock market weakness might open the way for return action to the range bottom at the 1.3750/39 area.
On Friday, USD/JPY held a tight sideways trading range close to the 96.00 barrier. With US markets close for the 4th of July holiday, trading conditions were very thin and there were no high profile headlines to guide trading activity.
This morning, the May Japanese leading indicators came out slightly higher compared to the previous month, but the release had no impact on markets. Asian stock markets continue the pattern from the end of last week. Japanese indices lose some ground and this is also the case for most other Asian indices. China remains the exception to the rule, as Chinese indices continue their recent ascent. The yen gained some ground against the euro and the dollar on global investor uncertainty.
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 still played a role, but is 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. The subsequent rebound ran into resistance ahead of the first resistance area (the early May highs). 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 and the 95.00/94.88 area provides some intermediate support short term. In a day-to-day perspective, we have the impression that markets are becoming a bit nervous ahead of the start of the earnings’ season. We maintain a buy-on-dips approach, but are not in a hurry to add to USD/JPY long positions at the current levels. Maybe there might arise opportunities to buy lower in the range in the days ahead.
On Friday, EUR/GBP was well bid early in the session, but soon settled in a sideways trading pattern in the upper half of the 0.85 big figure. The UK services PMI came out quite good at 51.6, but it had no lasting positive impact on sterling. The UK currency even lost some ground against the euro and closed the session at 0.8560, compared to 0.8542 on Thursday evening.
Today, eco calendar is again empty. So, global factors and technical considerations will again set the tone for trading in the sterling cross rates.
Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar). 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. We turned to a neutral approach vis-à-vis the UK currency. Nevertheless, there is still a lot of uncertainty on the BoE policy going forward (additional buying of assets?). In this respect markets will take a close look at outcome of this week’s BoE policy meeting. On top of that, recent comments from BoE policy members gave the impression that they felt quite comfortable with a weak pound to support the economy.
Over the previous two weeks, the ascent of sterling ran into resistance. Apparently, enough good news had been priced in for sterling at the current levels. Nevertheless, sterling showed rather resilient until now. Recently, we cut EUR/GBP short exposure and adopted a neutral bias for EUR/GBP. Regaining the 0.8605 area in a sustainable way 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. At the end of last week, a first attempt of such a break failed. So, for now this remains a range trading story. Nevertheless, we have the impression that the downside in this pair has become better protected. We wouldn’t be surprised that a new attempt to break higher would succeed. A sustained break above the 0.8605/29 area could open the way for return action to the 0.8867 area (previous reaction high).
