On Wednesday, EUR/USD showed a gain of more than one big figure. The driver of the move was obvious: improved investor risk appetite fueled by a positive stock market reaction to the first corporate earnings and some better than expected data (EU car registrations and, even more, the Empire State Manufacturing survey). EUR/USD jumped higher at the start of European trading and tested offers in the 1.41 area early in US trading. Despite an ongoing positive stock market sentiment, the rally of the single currency slowed later in the session. The minutes of the previous Fed meeting brought no market-sensitive info. They refrained from raising the asset purchase program as its impact on the economy was uncertain. Policy makers slightly raised their outlook for 2009 (and 2010). EUR/USD closed the session at 1.4107, compared to 1.3967 on Thursday.
Over the previous days, US Treasury Secretary Geithner several times repeated its confidence in the strength of the dollar and that the US currency will remain the major reserve currency. Of course, one can not expect the US Treasury Secretary to say anything else. Nevertheless, some dollar skeptics will say that the campaign might indicate some underlying nervousness among US policy markers on the dollar. It is probably not a ST issue for markets, but it remains a factor to keep in mind.
Today, the eco calendar is moderately interesting. European data are few, but in the US the jobless claims, the TIC data and the Philly Fed survey are on the agenda. On top of that a series of firms will report earnings including Nokia, JP Morgan Chase, IBM, Novartis and Google. The stock market performance most probably will continue to be the most important driver for trading. Until last week, 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. However, the publication of the first set of corporate earnings convinced investors to leave their skeptical attitude. Stocks showed quite a nice rebound and this also helped EUR/USD to regain the 1.40 mark. Only a week ago, the S&P tested the bottom of the MT sideways trading range at 875. After the rebound over the previous three sessions, the top of this range (943/956) comes again in the picture. We‘re not convinced that this barrier will broken that easily. If so, this could also cap the upward potential in EUR/USD. The fate financing company CIT might become of factor of investor caution, too.
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 as mirrored in the stock market performance.
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 for return action lower in this range. We hold on to that bias.
On Wednesday, the USD/JPY initially held a sideways trading pattern in the mid 93.00 area. However, the strong performance of the US stock markets finally pulled the trigger for scaling back yen long positions. USD/JPY jumped above the 94.00 mark and closed the session at 94.23 compared to 93.50 on Tuesday. This was a nice gain. Nevertheless, we have the impression that the bid in USD/JPY might be vulnerable if the stock market rebound were to shift into a lower gear.
This morning, Asian/Japanese stocks are in positive territory. However, the gains are not really spectacular when compared to the gains in the US and Europe yesterday. The May tertiary industry index showed a disappointing -0.1% M/M decline. Elsewhere in the region the (slightly) better than expected Chinese Q2 growth (7.9% Y/Y) drew some attention. However, we don’t have the impression that it will have a major impact on global markets or on currency trading.
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/JPY looks only possible if stock market sentiment were to improve. The stock rebound of the previous sessions is giving USD/JPY some downside protection, but we are not yet convinced that this will be the start of a new up-leg. The pair currency tests the 93.55/85 (previous lows). A sustained break above this are would be a first (cautious) sign that the downward pressure is easing.
On Wednesday, EUR/GBP basically held within a tight sideways trading pattern. This was a bit disappointing from a sterling point of view. Indeed, the UK labour market data came out (again) better than expected. However, the report had no lasting impact on EUR/GBP trading. The pair even rebounded close to the 0.8600 mark just before noon. There was a brief correction early in the US trading session, but later the pair returned to the top of the intraday trading range and closed the session at 0.8591, compared to 0.8562 on Tuesday. The price action in EUR/GBP was mostly the result of order driven activity in cable and EUR/USD. So, one shouldn’t draw any firm conclusion from yesterday’s price action in EUR/GBP. However, the least one can say is that UK was not really able to take advantage from a sterling positive environment.
Today, the UK eco calendar is empty.
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. 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. However, 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.
