On Wednesday, the EUR/USD currency pair showed quite a remarkable move. The pair came under pressure early in the session. This was ‘understandable’ given the steep losses on the Chinese stock markets. However, European stocks posted quite a good performance, supported by some better than expected corporate earnings. EUR/USD temporary recouped the earlier losses, but the picture remained heavy and the rebound could not be sustained. EUR/USD again tested the 1.41 area early in US trading. This area was a first obvious stop loss area (previous short-term lows). A (slightly) negative open on the US stock markets and the lower than expected German CPI release (-0.6% Y/Y) were both a good reason for traders to do some stop tripping and EUR/USD extended the correction that started on Tuesday. The US durable orders data came out close to expectations and had no lasting impact on EUR/USD trading. So, the move was most probably technical in nature. Nevertheless, it was a bit strange to see EUR/USD coming under pressure with some European stock markets (Dax) showing gains of around 2%. The steep decline of the oil price at the same time played a role, too. EUR/USD closed the session at 1.4050 compared to 1.4167 on Tuesday. It is much too early to draw conclusions after just one of correction. However, the least one can say is that yesterday’s move is not fully explicable from the risk appetite/risk aversion paradigm that dominated the EUR/USD price action in the recent past.
Today, the eco calendar in the US is thin with only the weekly jobless claims scheduled for release. Later in the session, the Treasury will sell $ 28 billion of 7-year Notes. The previous two auctions on Tuesday (2Y) and on Wednesday (5Y) went poorly but had no lasting impact on EUR/USD trading. In Europe, the German labour market data and the EU sentiment indicators will be published. The steep rise in unemployment is becoming a politically important item and will also become a factor of ever growing importance for monetary policy. However, it is not a decisive factor for the currency markets, yet.
After yesterday’s price action in EUR/USD, it will be interesting to monitor the link between the performances of (global) stock markets on the one hand and EUR/USD on the other hand. Yesterday, it looked as if the performance of the Chinese stock markets had become more important for EUR/USD trading, than the performance of stock market indices of developed countries. In this context, the swings in the oil price (and other cyclical commodities) deserve some attention, too. Smooth comments from the Chinese central bank on its credit policy this morning obviously had the intention to calm the (stock) market after yesterday’s volatile trading. However at least for now, the jury is still out whether this will be able to stop correction on the Chinese stock markets and indirectly the slide in the oil price. Some additional pressure on the commodity markets might continue to support the dollar short-term.
Global context. Since early June, EUR/USD kept a sideways trading pattern. 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 (cf today’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. Swings in global investor sentiment still had some impact on EUR/USD trading. However, given the strong stock market performance recently, EUR/USD was not able to break out of the established range, capped by the 1.4339 resistance. Over the previous days, we indicated that we were 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 would have to last till eternity. It is still early days, but yesterday’s price action might be a cautious indication that currency traders might be looking out for another trading theme.
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 had a sell-on-upticks approach as we thought that the 1.4339 area would be difficult to break. We hold to that bias.
On Wednesday, trading in several cross rates showed some strange swings and to some extent this was also the case in USD/JPY trading. The pair reached an intraday low close to the 94 mark early in European trading due to the steep decline on the Chinese stock markets. However, the pair quite easily recouped Tuesday’s losses and returned to the 95.00 area. This move was not that evident given the uncertainty/conflicting signals in other markets (European stocks higher, US stocks mixed and a sharp decline in the oil price). Nevertheless, after a disappointing performance on Tuesday, the USD/JPY obviously was in better shape yesterday.
This morning, Japanese industrial production data showed a fourth consecutive monthly rise (2.4% M/M), bringing the Y/Y decline to 23.4 %. The outcome was close to expectations. Asian stocks trade mixed to slightly higher this morning, which gives USD/JPY downside protection.
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 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. Even after yesterday’s rebound, we hold on to this assessment.
On Wednesday, EUR/GBP joined the broader euro correction that was also visible in EUR/USD. The UK money supply data were mixed, at best. Money supply and lending data were poor. The mortgage approvals were slightly higher than expected. However, we don’t see yesterday’s UK data as a good explanation for the gains of sterling against the single currency. So, also for this currency pair, technical considerations (asymmetrical swings between cable and EUR/USD) probably were the reason behind the move. EUR/GBP closed the session at 0.8578, compared to 0.8624 on Tuesday.
A few minutes ago, the Nationwide House prices were published. In line with other recent indicators from the housing market, the release came out better than expected. This might give sterling some support short-term. Later today the UK calendar is empty.
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. 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 (decision on August 06), 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.
