On Friday, EUR/USD traded in a sideways trading pattern in the 1.4100 area. However, as global stock market sentiment remained positive, the downside in EUR/USD was rather well protected, too. There was some market nervousness early in US trading (after the publication of the results of GE and Bank of America). EUR/USD dipped to the 1.4065 area at that time. However, US housing starts and permits came out better than expected and US stock market indices soon reversed the earlier losses. This kept the EUR/USD currency pair well bid. The pair closed the session at 1.4102, compared to 1.4148 on Thursday.
Today, the eco calendar is thin, with only the German producer prices and the US leading indicators on the agenda. Later in the session, Fed’s Lockhart will give a speech on the economy. Later this week, the calendar of macro-economic data is not that heavy. The European PMI data on Friday deserve some attention. However, the key drivers for trading will be Bernanke’s appearance before the US Congress and, of course, investors’ reaction to the corporate earnings results. This morning, sentiment remains constructive. Market hopes that Financial group CIT might be able to avoid bankruptcy might be a ST positive factor for global investor sentiment and for EUR/USD at the start of this new trading week.
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. Market 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 has 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 left the global picture for EUR/USD trading neutral and indecisive. None of those themes were 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.
At the start of the earnings season, there was a lot of investor skepticism on the pace of the global recovery. 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. Two weeks ago, the S&P tested the bottom of the MT sideways trading range at 875. After last week’s rebound, the top of this range (943/956) comes again in the picture. We‘re not convinced that this barrier will be broken that easily. If so, this could also cap the upward potential in EUR/USD.
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 EUR/USD was rather well bid at the end of last week. A sustained break above the 1.4338 range top would suggest a more profound change in market sentiment and would question our range trading strategy (stop loss).
On Friday, the USD/JPY cross rate recouped most of Thursday’s losses. The pair hovered sideways during the Asian session, but rebounded after the better than expected US housing data. US stock markets holding up rather well also kept the pair well bid. USD/JPY closed session at 94.19, compared to 93.93 on Thursday.
Today, Japanese markets are closed. Most Asian stock markets show again decent gains this morning. Headlines that CIT might have reached a refinancing deal are supporting global investor sentiment, too. USD/JPY was testing the 94.70 resistance area this morning.
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. Last week’s equity rebound helped USD/JPY to regain some ground. However, as long as the stock markets fail to regain key resistance (943/956 area in the S&P), we remain a bit reluctant to jump on this USD/JPY rebound.
On Friday, sterling lost ground, both against the dollar and the euro. There were no UK eco data. Trading was mostly order-driven. Lingering market uncertainty on the UK fiscal situation might have weighed on sterling, too. The EUR/GBP currency pair closed the session at 0.8633 compared to 0.8606 on Thursday.
Overnight, the Rightmove house prices showed a 0.6% M/M rise, bringing the Y/Y decline to -3.1%, compared to -5.5% in June. This indicator confirms the evidence from other data series that the UK housing market might have hit the bottom. The release might support sterling at the start of trading today.
Later today, the UK eco calendar contains the M4 Money supply data and the Bank of England releases a report on trends in lending. The latter might be interesting input for monetary policy.
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. The BoE’s decision not to raise the amount of asset purchases (temporary?) caused some market uncertainty on the BOE policy. However, over the previous days, 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 limit. In a longer term perspective, such a scenario would be sterling negative.
Recently, we advocated range trading for EUR/GBP within the barriers of the 0.8400/0.8700 trading range. We hold on to that bias. 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 highs would open the way for more sterling losses. The 0.8867 reaction high is the next target on the charts.
