On Friday, EUR/USD was again well supported, especially during the morning trad-ing in Europe. European confidence data (IFO and PMI) came out stronger than ex-pected and supported global sentiment. A lot of European stock market indices set new highs for the year and this pushed EUR/USD to regain the 1.42 mark. However, once again this intraday reaction was not able to change the global picture. EUR/USD still stayed below the week highs in the 1.4290 area. In the US, stocks even lost some ground early in the session and this capped the gains in EUR/USD, too. However, in a late session rally, stocks recouped most of the early gains, leaving EUR/USD with some decent gains, too. The pair closed the session at 1.4202, com-pared to 1.4143 on Thursday.
In a speech/interview, Fed president Bernanke repeated the message he brought last week in Congress. Among other elements, he repeated that growth in the near future would be too low to bring down the unemployment rate. In a question on the dollar, he said to support the strong dollar policy. We didn’t see any high profile new info in this speech. This morning, Asian stock markets show again decent gains and this continues to support the EUR/USD currency pair.
Today, the eco calendar is moderately interesting. In the US, the new home sales are scheduled for release. Last week, the better than expected existing home sales triggered an additional spike higher on the US stock markets. In Europe only some second tier data are on the agenda. The earnings season will continue this week in Europe and in the US. However, one might expect its impact on global markets to become somewhat less. Gradually, the market focus might return to the eco data. Especially, the US eco calendar will be well filled this week, with the US Q2 GDP fig-ure on the Friday catching the eye.
On Monday and on Tuesday, China and the US hold high level bilateral, ‘strategic and economic’ talks Washington. On the sidelines, these talks might bring some headlines on the role of the dollar, but we don’t expect this issue to be a dominant factor at this meeting.
Global context. Since early June, EUR/USD kept a sideways trading pattern. Swings in global investor sentiment still had some impact on EUR/USD trading. However, while the global stock market indices extensively tested key support and resistance areas during that period, EUR/USD was not able to break out of the es-tablished range. The macro data and the signals from policy makers on both sides of the Atlantic were also not able to unlock this stalemate. The Fed signaled that it will keep interest rates low for a prolonged period of time, even as the US central bank-ers are preparing an exit strategy that can be put in place when the economy would start to improve. In Europe, the ECB is still in a wait-and-see mode too. The ECB is concerned that the ECB measures don’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, too. This left the global picture for EUR/USD trading neutral and indeci-sive. 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.
After two weeks of global corporate earnings investors apparently grew more con-vinced that the global economy might have reached a bottom. Stocks showed quite a nice rebound and this also helped EUR/USD to regain the 1.40 mark. Stocks even set new year highs, but this was not enough for EUR/USD to clear the 1.4339 range top. At least for now, the ongoing stock rebound remains a EUR/USD supportive fac-tor. However, we’re not convinced that the rather tight link between investor risk ap-petite on the one hand and the performance of EUR/USD on the other hand will have to last till eternity. In this respect, we still doubt that EUR/USD will be able to clear the 1.4339 range top in a sustainable way. However, we have to stay open minded. In case of such a scenario, market sentiment might soon tilt to some kind of under-ling dollar skepticism (if not panic).
Looking at the technical charts, the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. The 1.42+ area was already tested sev-eral times, 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-on-upticks approach for return action lower in this range. We hold on to that bias. Nev-ertheless, we have to admit that EUR/USD remains rather well bid. 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 settled in an extremely tight sideways trading range roughly between 94.60 and 95.00, digesting the steep, stock market related gains on Thursday. Neither the stock market performance nor the eco data were able to give trading in USD/JPY a clear guidance. USD/JPY closed session at 94.79, compared to 94.92 on Thursday.
Today, Japanese corporate services prices came out close to expectations at -3.2% Y/Y. Asian stock again started the week on a positive tone. However, at least for now, this hardly leaves any traces on USD/JPY trading.
Global context. Since March, USD/JPY developed a sideways trading pattern be-tween 101.40 and 93.86/54 (May low/March low). The ‘traditional link’ between USD/JPY and the performance of global stock markets/risk appetite sometimes was not as tight is it used to be some time ago, but still played its role. A flaring up of in-vestor caution ahead of the earnings season hammered the pair through the long-standing 93.55 range early July. The pair reached a new bottom in the 91.75 area. Over the previous to weeks, the pair tried to regain some ground. However, given the strong performance of the stock markets, the USD/JPY rebound is far from im-pressive. Last week, the downside in USD/JPY become better protected (rumours on potential, semi-officials bids in case of USD/JPY weakness), but we stay cautious to joined this USD/JPY rebound. Stop-loss protection on USD/JPY longs is still war-ranted we think.
On Friday, sterling lost ground, both against the dollar and the euro as data showed that the UK economy contracted by 0.8%Q/Q (5.6% Y/Y) in the second quarter. The figure was well below the market consensus and made the UK currency to reverse the gains recorded after better than expected retail sales on Thursday. EUR/GBP started trading in the 0.8580 area at the start of trading in Europe and tested offers in the 0.8675 area at the start of US trading. The Q2 GDP figure clearly was a disap-pointment and it raised the market uncertainty on what to expect from the BoE policy decision, scheduled for next week. However, in a broader perspective, it hardly changed the broader picture as the EUR/GBP is still locked in a tight sideways trad-ing pattern. EUR/GBP closed the session at 0.8648, compared to 0.8582 on Thurs-day.
This morning, the Hometrack housing survey showed a stabilization of prices in July, the Y/Y decline slowed from -8.7% to -7.8%. However, the company indicated that a strong broad-based recovery is probably still some way off. Later today, the Bank of England will publish its Purchase facility quarterly report.
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 some-thing 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 caused some market uncertainty on the BoE policy, even as 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.
