On Tuesday, the EUR/USD price action initially copied Monday’s trading pattern. Ongoing global investor optimism kept the single currency well bid and EUR/USD re-visited the 1.43 mark early in European trading. However, as was the case on Mon-day, there was not follow-through buying. Later in the session, global stock market indices gradually slipped into negative territory and this was also a good reason to take profit on/scale back EUR/USD long exposure. Better than expected US CS house prices were not able the halt this correction and the weaker than expected consumer confidence release of the Conference Board supported the correction trade. After all, we think that yesterday’s price action was primarily driven by techni-cal considerations. EUR/USD longs have been raised in step with the stock market rebound of late, but a real test of the key 1.4339 level proved a too high hurdle in this market. Some disappointment kicked in and an unwinding of weak longs triggered a natural correction. What can’t go up must come down. The EUR/USD currency pair closed the session at 1.4167, compared to 1.4232 on Monday evening.
Today, the eco calendar is quite well filled. In the US, the durable orders, the Mort-gage applications and the Beige book are on the agenda. Until further notice, any re-action from currencies on these data/events will most probably continue to go via the stock markets. In Europe, the German CPI figure and the ECB lending survey will be published. Especially the lending data are a key factor for the ECB policy going for-ward. However, until now this kind of data had hardly any impact on the currency market. Later in the session, markets will look out for the 5-year auction in the US. Yesterday’s 2-year auction went rather difficult. The impact on the dollar was limited. However, more negative US auction results for longer maturities later this week, might be a (slightly) negative factor for the US currency.
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 their measures don’t filter through enough into bank lending (cf to-day’s ECB lending survey). 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 are 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 the first batch of global corporate earnings, investors apparently have become more convinced that the global economy might have reached a bottom. Stocks showed quite a nice rebound and this also supported the EUR/USD currency pair. The major stock market indices cleared some important resistance levels, but this signal was not enough for EUR/USD to clear the 1.4339 range top. The ongoing positive sentiment on the stock markets 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 continue to doubt that EUR/USD will be able to clear the 1.4339 range top in a sustainable way. We don’t cry victory yet, but yester-day’s price action might support this view. If EUR/USD would break above the 1.43/1.45 area, 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 sev-eral times, but a real test of the 1.4338 level didn’t occur. We maintain a sell on-up ticks approach in case of return action toward the top of the range. Nevertheless, even after yesterday’s correction, we have to admit that EUR/USD remains rather well bid. A sustained break above the 1.4339 range top would suggest a more pro-found change in market sentiment and would question our range trading strategy (stop loss).
On Tuesday, the recent USD/JPY rebound ran into resistance. Some profit-taking/consolidation on the stock markets after the recent rally was also a good ex-cuse to lock in some profits on USD/JPY long exposure. The (mixed) US data had hardly any impact on trading. The pair closed the session at 94.55, compared to 95.18 on Monday. This loss was far from spectacular, but given the resilience of the US stock markets (late session rebound), the USD/JPY price action still suggests some underlying dollar weakness.
This morning, Japanese retail data came out on the weak side of expectations. Early in Asian trade, USD/JPY received some support from a decent start of the Japanese stock markets. However, the gains could not be preserved and USD/JPY returned to the low 94-area at the moment of writing.
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 bottom 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. Over the previous days, we indicated that we were not convinced on sustainability of the USD/JPY rebound. After yesterday’s correction we hold on to this assessment.
On Tuesday, EUR/GBP was paralyzed in a very tight sideways trading pattern in the 0.8620/45 area. The CBI distributive trades report indicated ongoing weakness with UK retailers in the month July and no improvement was expected for the month of August. However, the impact on EUR/GBP was close to non-existent. A wave of profit taking in EUR/USD through the crosses even dragged EUR/GBP a few ticks lower later in the session. EUR/GBP closed the session at 0.8624 compared to 0.8634 on Monday.
Today, UK money supply and lending data are on the agenda. This is a (politically) sensitive item and it might also affect the next steps in the BoE policy. Poor figures might raise the pressure on the Bank to extend its policy of QE and in theory would be a negative factor for sterling.
Global context. Since mid June, the powerful sterling rebound ran into resistance. The BoE’s decision early July 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.
