On Tuesday, EUR/USD traders were still desperately looking for guidance. However, even a long series of European and US eco data and some high profile corporate earnings were again not able to unlock the stalemate. EUR/USD hovered up and down in a very tight range close to the 1.40 mark. US equity markets failed to draw any firm conclusions from the US retail sales and (better than expected) results from Goldman Sachs and Johnson & Johnson. This indecisive market reaction was also mirrored in the price action of the major currency cross rates. EUR/USD temporary dipped to the low 1.3920 area after the close of the European markets, but finally the pair closed the session at 1.3967, little changed from the 1.3978 close on Monday. After the bell, Intel reported better than expected results, too. This news sent stock market futures higher and also supported EUR/USD overnight. Nevertheless, the gains were limited after all.
Today, the eco calendar is again well filled with the European and the US CPI data, the US mortgage applications, the Empire state manufacturing index and the US industrial production data. Markets will also look out for the results of Rio Tinto and Abbott Laboratories, among others. After the close of the European markets, the Minutes of the previous Fed meeting will also draw some attention. For almost all of the data and events, the reaction on the currency markets (and on EUR/USD) will go via the stock markets.
Recently, stocks and the major currency cross rates didn’t really know which direction to go. There was a lot of investor skepticism on the pace of the global recovery going into the earnings season, but after all, the losses on the stock markets were still rather contained. This locked EUR/USD in a lackluster trading pattern, too. The first results that were published were not that bad. The stock market reaction was constructive, but far from euphoric. This cautious global attitude is also preventing EUR/USD from making a big step north.
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. Lingering concerns on the health of the European banking sector might be/become a source of euro caution, 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.
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 global investor caution might open the way for return action to the range bottom at the 1.3750/39 area.
On Tuesday, the USD/JPY hovered around the 93.00 mark for most of the day. At first, the constructive stock market sentiment in Asia and Europe only had a limited impact on USD/JPY trading. However, a positive close of the US markets and better than expected Intel results triggered a late session rebound in USD/JPY. The pair closed the session at 93.50, compared to 92.978 on Monday.
This morning, Asian/Japanese stocks are in positive territory, but the USD/JPY is not really able to record any gains worth mentioning. As widely expected, the BOJ kept its policy rate unchanged at 0.1%. The BOJ extended its corporate funding support measures for three months until the end of December. The BOJ also lowered its GDP forecast in the year to March 2010 to a contraction of 3.4% (From 3.1%).
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 looks only possible if stock market sentiment were to improve for the better. The stock rebound of the previous two sessions is giving USD/JPY some downside protection, but it is a bit too early to conclude that this will be the start of a new upleg. Sustained price action above the 93.55/85 (previous lows) would be a first (cautious) sign that the downward pressure is easing. However, we have the impression that a clear break of this area won’t be that easy.
On Tuesday, sterling was well bid throughout most of the session. Positive eco data (RICS and BRC retails sales) create a sterling friendly environment at the open of the European trading session. The UK CPI came out perfectly in line with expectations. Adam Poser, who will join the MPC in September, said he expected sterling to trade stronger against the euro on the medium term as he was more pessimistic on the euro zone. He also indicated that ‘much too much is being made of this so-called pause (in QE). After all, except for the good early morning data, we didn’t see much new info yesterday’s BOE comments. So, the gains in sterling were probably at least partially due to the improved global sentiment. EUR/GBP closed the session at 0.8562, compared to 0.8614 on Monday.
Overnight, BoE’s Bean in an interview suggested that the Bank could ask the Finance minister to do more than the £150 billion. The review of the economic forecasts next month will be a good point to make a decision on this issue.
Today, the UK eco calendar contains the labour market data. Usually, these data are no big mover for the currency markets, but some intra-day reaction is always possible.
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?) caused some market uncertainty on the BoE policy going forward and blocked the EUR/GBP rebound. Over the previous day’s, BoE members kept all options open and indicated that the matter will be decided at the August meeting. The jury is still out on this issue, but we have the impression that there is reasonable chance for the BoE to extend its asset purchase program, even beyond the £150 billion limited. In a longer term perspective, such a scenario would be sterling negative.
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. Given the uncertainty on the BoE policy, we still slightly prefer a buy-on-dips approach in case of return action lower in the mentioned trading range. 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.
