On Wednesday, the EUR/USD currency pair was well bid. As usual, part of the gains could be explained by the constructive stock market sentiment. European stocks on average showed decent gains and the S&P is still holding above the key 875 support area. Sentiment is still fragile but this cautiously positive environment gave the euro downside protection. Later in the session, the better than expected (lower) jobless claims release added to this positive sentiment. At time of the European close, EUR/USD (and cable) showed another upleg. This time the move was order driven (stocks didn’t do anything to support the move at that time). EUR/USD closed the session at 1.4020, compared to 1.3384 on Wednesday evening. In the G8 +G5 meeting, China repeated its call for reform of the reserve currency system. However, as was the case over the previous sessions, the direct impact of this debate on currency trading was limited.
This was quite a nice performance, but in a broader perspective, EUR/USD is captured in a rather lackluster sideways trading pattern.
Today, the US trade balance, the import prices and the Michigan consumer confidence will be published. Trade balance data often contain conflicting signals for the markets in general and for the currency market in particular. A lower trade deficit in theory should be supportive for the currency. However, how should markets react if a lower trade deficit is due to a shaper fall imports compared to exports? So, the figure might contain some interesting economic information, but we don’t expect the release to have a lasting impact on currency trading. The Michigan consumer confidence might, through its impact on stock markets, have some intra-day impact on EUR/USD trading. However, global markets are still counting down to the ‘real’ start of the (US) earnings season next week.
Global context. During the month of June, EUR/USD kept a sideways trading pattern. Global investors turned again more cautious on the strength of a potential economic recovery and this capped the ascent in EUR/USD. However, the dollar was 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. 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. The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. 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. Nevertheless, in this context, the debate in Germany whether the Buba should buy corporate bonds (cf Steinbrueck comments recently) also deserves attention.
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, EUR/USD traders continue to watch global investor sentiment and track the swings on the stock markets. In this context, the market reaction to the Q2 corporate earnings season might hold the key for the next big move on global markets in general and on the currency market.
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 as the rebound stalled in the 1.42-area. Recently, we advocated that a 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 Thursday, USD/JPY settled in a sideways trading pattern around the 93.00 big figure, digesting the steep decline that occurred on Wednesday evening. Global stock market indices were stable to cautiously higher, but it didn’t help USD/JPY to perform any rebound worth mentioning. So, investors obviously remain very cautious ahead of the earnings season. USD/JPY closed the session at 92.99 (92.88 on Wednesday evening).
This morning, Japanese wholesale prices showed a steeper than expected decline (- 0.3% M/M, -6.6% Y/Y). The release had hardly any impact on yen trading but it illustrates that (the risk for) deflation will remain the factor of importance in the BOJ policy approach. This morning, Asian stocks show a mixed picture. Chinese markets still take the lead; Japan is lagging (with moderate losses). The yen remains well bid.
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 at some times was not as tight is it used to be some time ago, but still played 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. However, a flaring up of investor caution ahead of the earnings season earlier this week hammered the pair through the longstanding 93.55 range bottom. After this high profile technical signal, we were forced to leave our neutral bias/range trading strategy in this pair. For now, the verbal support from Japanese officials, at best, is able to slow the decline in this pair. A sustained rebound only looks possible if stock market sentiment were to improve for the better. We don’t bet on such scenario yet. Tight stop-loss protection on USD/JPY longs is still warranted. Short-term players can look to sell into strength.
Yesterday, the BoE monetary policy decision was the key event for UK markets. The BoE surprised markets as it didn’t raise the amount of its £125 billion asset buying scheme. Markets expected the Bank to raise the asset purchases by £25B. The decision on this issue has been delayed till the August 6 Meeting, when a new inflation report will be available. UK yields jumped higher on this announcement and the also sterling got a shot in the arm. EUR/GBP was traded in the 0.8630 area before the announcement and returned below the 0.86 mark later in the session. The pair closed the session at 0.8582; compared to 0.8639 on Wednesday. As the BoE decision was quite a big surprise for markets, one might even come to the conclusion that the gains in sterling were not really that spectacular.
Today, the UK calendar only contains the PPI data. We don’t expect these data to have a lasting impact on currency trading.
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 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 and this hasn’t changed after yesterday’s BoE decision. 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 (temporary) the 0.8600 resistance area, improving the ST picture in this pair. However, yesterday’s surprising BoE decision not to raise the amount of asset purchases blocked the recent sterling correction. EUR/GBP returned within the previous 0.8400/0.8605 trading range. Over the previous days, we had a ST positive bias on EUR/GBP. After yesterday’s events, we amend our bias again to neutral.
