On Monday, the EUR/USD currency pair showed some intraday swings, but after all the pair was still captured in an indecisive sideways trading pattern. There were no important eco data to give the market a clear guidance. Even stock markets were not able to give EUR/USD trading a clear direction. Rather steep losses on the Asian stock markets caused EUR/USD to set an intraday low in the 1.3900 area at the start of trading in Europe. However, the European stock markets did strike a more positive tone, supported by the better than expected results of Philips. Market hopes that this trend would continue in the US helped EUR/USD to reach intraday highs in the 1.3990 area as soon as US traders joined the action. Investors were cautious early in the US session and EUR/USD gave up the biggest part its earlier gains. However, later in the session, US stocks joined the positive mood in Europe supported by hopes that results, especially from the banking sector, would be better than feared until now. EUR/USD tested offers in the 1.40 area and closed the session at 1.3978, compared to 1.3936 on Friday.
Today, the eco calendar is quite interesting with the German ZEW economic sentiment survey and the European industrial production data scheduled for release. In the US, the PPI and the retail sales will be published. Especially the latter has market moving potential. Investors are looking for signals that final demand is bottoming out (or even improving) and the retail sales are a small piece to complete this puzzle. Any reaction in EUR/USD will again almost certainly go via the reaction on the stock markets.
Even more than the eco data, the first corporate earnings that will be published today might set the tone for trading on global markets and thus on the currency markets. The least one can say is that equity markets didn’t really know which direction to go. Recently there was a lot of investor skepticism on the pace of the global recovery, but after all, a real sell-off on the stock markets didn’t occur either. This locked EUR/USD in a lackluster trading pattern, too. Interesting to see whether the earnings season will be able to unlock this stalemate. Yesterday, investor sentiment improved slightly but this was mostly based on hope. The first reality check might come today.
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, 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, this is still a long call.
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 resistance area would be difficult and maintained a sell-onupticks 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 Monday, the USD/JPY cross rate remained under pressure in Asia and early in European trading. The steep losses on most Asian stock markets supported the yen and the pair even set a new minor low in the 91.75 area. However, as investors turned less negative later in the session, some profit taking on yen longs kicked in and USD/JPY regained more than one big figure. The pair closed the session at 92.97 compared to 92.54 on Friday.
This morning, Asian/Japanese stocks joined the rebound that started yesterday in Europe and in the US. Japanese officials and firms are pleading for the BOJ to extend its unconventional measures aimed to facilitate corporate funding beyond the September expiry.
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. A flaring up of investor caution ahead of the earnings season hammered the pair through the longstanding 93.55 range bottom last week. After this high profile technical signal, we were forced to leave our neutral bias/range trading strategy in this pair. A sustained rebound in USD/JP only looks possible if stock market sentiment were to improve for the better. Yesterday/today’s stock market rebound gives USD/JPY some downside protection, but it is a bit too early to conclude that this will be the start of a sustained up-leg. ST players can lock in some profits on yen long positions. Sustained price action above the 93.55 (previous low) would be a first (cautious) sign that the downward pressure is easing.
On Monday, sterling continued to fight an uphill battle. Early in the session, the UK currency lost ground against the dollar and the euro. There were no hard data but uncertainty on the fiscal and monetary developments in the UK continue to weigh on sterling. Press articles on the dire state of the UK fiscal situation and lingering uncertainty on the UK financial system might have played a role. EUR/GBP reached an intraday high close to the 0.87 mark. However, once again no follow-through gains occurred. The improvement in global sentiment even helped sterling to regain most of the earlier losses. EUR/GBP closed the session at 0.8614, compared to 0.8592 on Friday. BoE’s Bean in a speech said that the UK recovery ‘may be a long haul’. He said that policy makers are watching to see whether they need to do more. So, he at least didn’t give the impression that a scaling down of the QE is planned anytime soon.
Overnight, the RICS house price balance showed a remarkable improvement from - 43.8% to -18.1% (much better than the expected -40.0%). Other details in the report also support the hope that activity in the housing market is recovering. The BRC retail sales monitor also showed a rebound in sales in June. Until now, those data had hardly any impact on sterling trading. However, it might support sentiment toward the UK currency later today.
Today, the UK eco calendar contains the CPI. The headline inflation is expected to come down from 2.2% in May to 1.8% in June. A steeper decline might fuel deflation fears and could lead to renewed market speculation that the BoE will have to extend its QE/asset purchases.
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 not really convinced 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 0.8400/0.8700 ranges looks the name of the game in EUR/GBP trading. Nevertheless, the price action yesterday and on Friday suggests that underlying sterling sentiment didn’t really improve after last week’s BoE decision. A sustained break above the 0.8672/0.8700 reaction high would open the way for more sterling losses. The 0.8867 reaction high is the next target on the charts.
