On Monday, EUR/USD held close to the recent highs. However, once again a real test of the 1.4339 range top didn’t occur. The EUR/USD came close to the 1.4300 area around noon in Europe, supported by a solid stock market performance at that time. However, the gains could not be sustained and even a stronger than expected US new home sales release was not able to trigger a new upleg, neither on the stock markets nor in EUR/USD. The pair closed the session at 1.4232, compared to 1.4202 on Friday evening.
In the (currency) markets, investors continue to keep an eye on the economic and political talks between the US and China that started in Washington on Monday. Declarations from both sides mirrored their well-known priorities. The US repeated its call for China to boost domestic spending and on the need for a more flexible yuan (US). China continues to repeat its pleading for the US to guarantee the security of its investments in the US. For now, there were no high profile declarations that had a direct impact on the currency markets. Investors will look out for the official communiqué that will be published after today’s talks.
Today, the eco calendar is thin in Europe. In the US, investors will look out for the CS home prices, the July consumer confidence and the Richmond Fed manufacturing index. Recently, some US data releases signaling a potential improvement in the US housing market had some (intraday) impact on the stock markets and also on EUR/USD. We watch out whether the CS house prices will have a similar effect today. Later in the session, bond investors will take a close look at the outcome of the 2-year auction in the US, but don’t expect this to be a decisive factor for currency trading.
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 established 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 bankers 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 their 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 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.
After two weeks of global corporate earnings, investors apparently grew more convinced 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 factor. However, we’re not convinced that the rather tight link between investor risk appetite 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 underling 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 several 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-onupticks approach for return action lower in this range. We hold on to that bias. Nevertheless, we have to admit that EUR/USD remains rather well bid. A sustained break above the 1.4339 range top would suggest a more profound change in market sentiment and would question our range trading strategy (stop loss).
On Monday, the USD/JPY was well bid. In Asia and early in European trading, the pair was support by the further gains on the stock markets. A second up-leg occurred early in US trading, with the pair reaching an intraday high in the 95.35 area after the publication of the better than expected US new home sales. The pair closed the session at 95.18, compared to 94.79 on Friday.
There were no important eco data in Japan this morning. Asian stock market indices were mixed to slightly higher. USD/JPY stabilized closed to the 95.00 mark.
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 appetite sometimes 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 early July. The pair reached a new bottom in the 91.75 area. Over the previous to weeks, the pair regained some ground supported by the improved global investor sentiment and the gains on the stock markets. However, given the strong performance of the stock markets, the USD/JPY rebound is far from impressive. 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 warranted we think.
On Monday, EUR/GBP trading again showed some intraday volatility. There were no key economic data on the agenda and trading was driven by technical factors. EUR/GBP reached an intraday high in the 0.8685 area around noon (more or less in step with EUR/USD). However, also in the currency pair a real test of the recent highs didn’t occur and the pair gave up its early gains later in the session and closes the day at 0.8634, compared to 0.8648 on Friday. According to the BoE’s Quarterly Asset Purchase Facility report, there was an improvement in some areas of lending/ financing in Q2 compared to Q1. Especially large companies could raise more finance via the issuance of corporate bonds. However, in an interview, UK finance Minister Darling indicated that there was still a lot to do to improve credit availability for small business.
Today, the CBI distributive trades report is scheduled for release. It will be interesting to see whether this report will be able to confirm last week’s improvement in the (Jun) retail sales.
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 caused quite some investor uncertainty on the BoE policy. 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 0.8700 range top would open the way for more sterling losses. The 0.8867 reaction high is the next target on the charts.
