On Friday, the EUR/USD currency pair again didn’t find a clear trend. The pair was under pressure in Asia and in Europe. Global investor caution ahead of the earnings season weighed on most (European) stock market indices and also put some pressure on the single currency. The pair set an intra-day low in the 1.3880 area around noon. Later in the session, pair recouped part of the earlier losses. The US data were mixed with the trade balance better than expected and the import prices higher than expected. However, there was no noticeable impact on currency trading. Even a weaker than expected Michigan consumer confidence (and a temporary decline of the US stock markets after the release) had no lasting impact on EUR/USD trading. The pair closed the session at 1.3936; compared to the 1.4020 on Thursday. However, in a broader perspective, the pair still holds a rather tight sideways trading pattern close to the 1.40 mark.
Today, the eco calendar is almost empty. A speech of ECB president Trichet in Munich is the only item worth mentioning. So, markets will continue to focus on what to expect from the earnings season. From a global market point of view, investors will probably focus on companies’ guidance for the second half of the year. Key question is whether companies will see any green shoots going forward, especially in final demand? In this environment, the technical picture of the major stock market indices will continue to be an important input for other markets. Most European indices dropped already below key support levels, but to assess global market sentiment, we continue to take a close look at the (broad) US indices, like the S&P. A sustained break below the 875 area would signal renewed investor caution on the global economic recovery and might be a negative for the single currency against the dollar. Negative headlines/concerns on the European financial sector might point in the same direction.
Global context. During the month of June, EUR/USD kept a sideways trading pattern. Global investors turned 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 had to take 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.
This leaves 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. This will most probably continue to be the case going into the Q2 corporate earnings season. The market reaction to the earnings 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. The 1.4175/1.42 area was already tested twice, but a real test of the 1.4338 level didn’t occur. 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 Friday, the yen remained well bid. USD/JPY was already under (moderate) pressure in Asia and in Europe and the move even accelerated during the US trading hours. The pair revisited the week lows in the 91.80 area after the publication of a weaker than expected Michigan consumer confidence release. However, the losses on the US stock markets remained rather continued and USD/JPY regained part of the earlier losses. USD/JPY close the session at 92.54, compared to 92.99 on Thursday.
This morning, there were a lot of headlines from the political scene in Japan (Prime Minister Aso seeking national polls for Aug 30, the DJP beating the LDP in elections for Tokyo’s city assembly). However, the impact on markets is limited. Apparently, there is also some debate within the Democratic Party whether Japan should consider diversifying its currency reserves. Most Asian equity markets show rather steep losses this morning. This keeps the yen well bid at the start of the new trading week.
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 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 last 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 still can look to sell into strength.
On Friday, sterling first extended the post BoE rebound. EUR/GBP tested bids in the 0.8540 area early in European trade. However, sterling could not hold on to its gains (despite global euro weakness). The release of lower than expected UK PPI output prices might have played a role. On top of that, Thursday’s BoE interest rate decision leaves the market with a lot of uncertainty (cf infra). This also affects the UK currency. Whatever the reason, EUR/GBP recouped the early losses quite easily and even closed the session with a slight gain at 0.8592, compared to 0.8582 on Thursday.
Today, the UK eco calendar is almost empty. Only a reverse BoE auction is scheduled.
Global context. During the month of May and first half of June, 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. Since mid June, the sterling rebound ran into resistance and it even looked that a sterling correction would start as enough good news had been priced in. However, last week’s BoE decision not to raise to amount of asset purchases (temporary?) blocked the EUR/GBP rebound. At first sight, this decision looks sterling supportive. If the BoE came to the conclusion that the worst is over for the UK economy and that this was a good reason not to expand its program of QE, a sterling rebound would be a logical market reaction. However, we are a bit uncertain on this interpretation. Another, less sterling friendly interpretation might be that the BoE is unsure on the impact of this unconventional policy approach on the economy. If this kind of analysis was (partly) at the origin of the BoE decision, the picture (also for sterling) would be quite different. The minutes of last week’s BoE meeting will be interesting literature.
Last week, we amended our ST bias for EUR/GBP from positive to neutral. We hold on to that bias. For now, range trading within the 0.8400/0.8672 ranges looks the name of the game in EUR/GBP trading. Nevertheless, Friday’s price action suggests that underlying sterling sentiment didn’t really improve after last week’s BoE decision. A sustained break above the 0.8672 reaction high would open the way for more sterling losses. The 0.8867 reaction high is the next target on the charts.
