On Thursday, EUR/USD entered calmer waters, after the stock market driven gains on Wednesday. The pair moved sideways in the 1.4060/1.41 area during the morning sessions. A stock market rebound immediately after the publication of the JPM result also propelled EUR/USD higher into the 1.41 big figure. The pair reached an intraday high in the mid 1.4100 area after the publication of better/lower than expected US jobless claims data. Market optimism temporary faded going into the open of the US stock markets. A disappointing Philly Fed release only added to the investor caution. However, the late session up-leg on the US stock markets also caused EUR/USD to revisit the intraday highs. The pair closed the session at 1.4148, compared to 1.4107 on Wednesday. So, developments on the stock markets continued to guide the intraday price action on the currency markets. However, in a broader perspective, EUR/USD is still locked in a rather tight sideways trading pattern.
Today, the eco calendar is rather thin. In Europe, only some second tier data are scheduled for release. In the US, the housing starts and Building permits will be published. However, we only expect these data to be of intra-day importance. Regarding the corporate earnings, the results of Citigroup, Bank of America and GE, among others, will get extensive media coverage. After the results of Goldman Sachs and JP Morgan, investors will look out whether the trend of better than expected results in the banking sector will be maintained. So, the stock market performance will continue to be the most important driver for trading.
Global context. Since early 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 June 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, the ECB 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 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.
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 of financing company CIT might become of factor of investor caution, too.
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. Nevertheless, we have to admit that the performance of the US dollar over the previous session was not really convincing.
On Thursday, the USD/JPY cross rate returned most of Wednesday’s gains. The pair set an intraday high in the 94.40 area in Asia, but the yen remained well bid in Asian trading and during the morning session in Europe. The pair set an intra-day low in the 93.25 area after the weaker than expected Philly Fed survey. USD/JPY regained some ground on the stock market rebound and closed the session at 93.93. (94.23 on Wednesday). Once again, this feels like a disappointing performance from the US currency as it failed to build out gains against the yen in a context of improving risk appetite.
This morning, Asian/Japanese stocks are in again in positive territory. The yen trades slightly higher. Uncertainty on the next set of (US) bank results and some investor caution after the explosions in hotels in Jakarta might have played a role. There is also market talk of continued USD offers from Japanese exporters.
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 in a sustainable way. The equity rebound of the previous sessions is giving USD/JPY some downside protection, but at least for now, the progress of USD/JPY is far from impressive. Over the previous days, we already indicated that we were not convinced that USD/JPY would be able to start a new up-leg. We hold on to that view.
On Thursday, there was not much to tell on the EUR/GBP price action. There were not UK eco data and the EUR/GBP hovered up and down in an extremely tight trading range around the 0.8600 mark.
In an annual assessment on the UK economy, published yesterday, the IMF expects the UK economy to contract by 4.2% in 2009. The Budget deficit is seen close to 13% this year and next year. The IMF stressed that the success of the current policy depends on continued trust in the sustainability of the fiscal position.
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 the 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.
