Today, the US data calendar is again thin, but investors will watch out for the result of the 10-year auction. A poor auction might be (slightly) negative for the US cur-rency. In Europe, the German industrial production data will be published. Yesterday, the better than expected German orders data temporary supported sentiment on European markets. However, we doubt whether this pattern can be repeated today. During the day, the media will give extensive coverage on the G8 summit in Italy. Currency traders will take a close look at any comments on the dollar’s status as re-serve currency. However, we still expect the impact from any headlines on this issue to have only a limited and temporary impact on the US currency. Watching the stock markets will most probably be again much more important than this fundamental is-sue on the dollar’s position in the international financial system. Global investors will look for guidance from first Q2 corporate results (Alcoa will publish results after the close of the US markets this evening). The least on can say is that there is quite some investor skepticism going into the earnings season. This is not really a favour-able context for the single currency. In this respect we still watch the 975 area in the S&P. A sustained break below this level would indicate a new phase of investor risk aversion with negative consequences for EUR/USD.
Global context. During the month of June, EUR/USD kept a sideways trading pat-tern. Global investors turned again more cautious on the strength of a potential eco-nomic recovery and this 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. From time to time, the debate on the status of the dollar as reserve currency resurfaced, causing temporary set-backs for the US currency. Re-garding 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. 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. 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 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 level didn’t occur. Recently, we advo-cated that a break of this area would be difficult and maintained a sell-on-upticks ap-proach. 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 Tuesday, USD/JPY tacked again the swings on global markets. The pair initially held a sideways trading pattern between 95.00 and 95.45 as European stock mar-kets opened cautiously higher. However, investors in the US became again more risk averse and USD/JPY was captured in a new downward spiral. The pair closed the session at 94.89, compared to 95.35 on Monday. The move extended this morning, as Asian stock market joined the decline in US markets yesterday evening.
This morning, Japanese eco data came out disappointed as the May machinery or-ders showed an unexpected monthly decline. The May current account and trade balance showed also a smaller than expected surplus. Especially the poor machine orders release raised question on the eco recovery and weighs on investor senti-ment.
Global context. Since March, USD/JPY developed a sideways trading pattern be-tween 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 was not always 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. The subsequent rebound ran into resistance ahead of the first resis-tance area (the early May highs) and the recent correction on the stock markets trig-gered a rebound in the yen. USD/JPY is now coming within striking distance of the key 93.85/93.55 support area. Recently, advocated that a break of this area would be difficult. One can expect verbal support from Japanese officials in case of a swift rise of the yen. Nevertheless, over the previous days, we indicated that we would wait for signals that the stock market correction is bottoming out before taking (addi-tional) long positions. A sustained break below the 93.55 support would overthrow the long standing sideways trading pattern that has been in place since mid march and would suggest another major down-leg in this pair. In such a scenario stop-loss protection on USD/JPY longs is highly warranted.
Yesterday, sterling came again under pressure, both against the dollar and the euro. Cable dropping below a first short-term support area on Monday was already a sign of underlying sterling weakness. However, yesterday the UK data reinforced this sterling skeptic attitude as the May production data came out much worse than ex-pected. This data release triggered a new wave of sterling selling and the EUR/GBP tested offers in the 0.8655 area late European trading. There was a small correction during the US trading session. However, EUR/GBP closed the session at 0.8627, compared to 0.8585 on Monday.
This morning, UK Nationwide consumer confidence came out better than expected at 58, from 54 in May. Once again sterling ignored this (positive) news. Later today, the Halifax house price index will be published. A small (monthly) rise in house price is expected. However, in the current environment, a much better than expected fig-ure is needed to give sterling any support, we believe. Markets will look forward to tomorrow’s Bank of England policy meeting. One might expect the Bank to an-nounce that it will raise the amount of asset purchase to the full amount approved of £150. Over the previous days there were several calls for the Bank to extend its as-set purchases beyond this level. We don’t expect the BoE to take already any en-gagement on this issue tomorrow. We expect this to be discussed and decided at the August meeting. Nevertheless, more negative economic news headlines might fuel market speculation that the BoE will have to take additional steps (ask for gov-ernment approval to raise the amount of asset purchases). This would again create a sterling negative environment.
Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar) supported by improving eco data. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in in-vestor 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 go-ing forward (cf supra). 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. At first, the sterling losses were still rather contained, but over the previous sessions, sterling faced more selling pressure. EUR/GBP regained the 0.8600 resistance area, im-proving the ST picture in this pair. Over the previous days, we indicated that we had the impression that the downside in this pair has become better protected and that we would be surprised to see EUR/GBP building on this first technical signal. We hold on to that bias. The 0.8867 reaction high is next high profile resistance on the charts and could be the target of this correction.
