On Monday, trading in the EUR/USD cross rate was again confined within the barriers of a tight sideways trading pattern. There were hardly any economic data to guide the price action. The European industrial new orders came out better than expected but had no lasting impact on trading. Stocks showed decent gains in European trading and also the start of the US session was not that bad. This supported the single currency. However, a test of the Friday highs in the 1.4375 area didn’t occur. Later in the session, US stocks gave up the early gains later in the session and this blocked the upside in EUR/USD, too. The pair gave up the early gains and closed the session at 1.4304, compared to a 1.4326 close on Friday evening. So, after all, not much had happened in EUR/USD trading.
Today, the eco calendar is quite well filled, especially in the US with the CS house prices and the consumer confidence (Conference Board) scheduled for release. Later in the session, the US Treasury will auction $42B of 2-year Notes. In Europe, Belgian business confidence will be released. The market focus will be on the CS house prices and on the consumer confidence release. Recently, the (stock) markets reacted in a positive way to better than expected US housing data. Via the stock markets, this had also a limited impact on EUR/USD. (Some) US consumer confidence data recently tended to come out somewhat weaker after the improvement registered earlier this year. A further improvement might be a (slightly) positive for the stock markets. So, the US releases, via the stock market reaction, might have some intraday impact on EUR/USD trading, but we don’t expect them to have the power to push the pair out of the recent, tight trading range. The news that Ben Bernanke will be nominated to a second term as Fed Chairman might a be supportive factor for global markets, but at least for now it has no noticeable impact on EUR/USD trading.
Since early June, trading in the EUR/USD currency pair has been locked in a lackluster, sideways trading pattern. Monetary policy makers on both sides of the Atlantic are in the phase of executing the conventional and non-conventional measures that were put in place earlier this year to address the financial and economic crisis. Recently, there were encouraging signs that the worst of this crisis might be over. However, low inflation and ongoing uncertainty on the strength of the recovery allow the Fed and the ECB to keep a wait-and-see stance. For now, both central banks indicate they will continue to run the current stimulating monetary policy for a prolonged period of time. So, interest rate expectations/interest rate differentials do not offer a clear guide for EUR/USD trading and probably won’t be able to do so anytime soon. In this context, currency investors had to look for other trading themes to guide the price action. The swings in risk appetite/risk aversion are the most obvious alternative. The dollar and the yen are supposed to experience an exit of safe haven flows in favour of the euro and other ‘riskier’ currencies when global investor sentiment is improving. However, during the recent stock market up-leg, the link between EUR/USD and global stocks was far less tight compared to what it was in spring. This leaves the picture for EUR/USD trading neutral and indecisive. For the time being, one might expect trading to remain order driven and technical in nature.
Looking at the technical charts, the EUR/USD currency pair set a minor new high in the 1.4447 area early in August. However, this move didn’t really challenge longstanding sideways trading pattern. We do not frontrun on a break out of this established sideways trading pattern between 1.4000 and 1.4450. Short-term players can continue to try to exploit this range.
On Monday, yen traders continued to look for inspiration at global investor sentiment as mirrored in the performance of the major stock markets indices. Decent equity gains in Asia and early European trading kept the yen under pressure early in the session. USD/JPY reached an intraday high in the 95 area at the end of trading in Asia. However, the stock market rebound ran into resistance later in the session and this caused the USD/JPY currency pair to give up its early gains. The pair closed the session at 94.56 compared to 94.38 on Friday evening.
There were no important eco data in Japan this morning. Asian stocks face some profit taking this morning and this is supporting the yen against other major currencies. USD/JPY is testing the 94.00 big figure at the moment of writing.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area on a better than expected US payrolls release early August. However, despite a positive global investor/stock market sentiment the US currency could not hold on to its gains against the yen. This indicates underlying dollar weakness. There is still some kind of link between USD/JPY and swings global investor risk appetite and risk aversion. However, for now we have the impression that the link is somewhat asymmetric. USD/JPY hardly gains on a strong stock market performance while negative stock market corrections continue to support the yen. In this environment we prefer a sell on-upticks approach for USD/JPY. A break below the ST low at 93.42 could reinforce the downward momentum in this pair.
On Monday, sterling remained under pressure against the euro. There were no new eco data or headline stories to explain the move. However, investors continue to sell the UK currency as the increase in the BoE asset purchases and the recent steep decline in (ST) UK bond yields reduced the attractiveness of the UK currency. The EUR/GBP currency pair tested the 0.8699 range top and even managed to clear this key level at the end of the European trading session. Option related activity was said to have supported this move. The pair reached an intraday high in the 0.8726 area and closed the session at 0.8711, compared to 0.8686 on Friday evening.
Today, the UK eco calendar only contains the BBA loans for house purchases. After the close of the European markets, BoE Deputy Governor Bean will make a speech at a conference in Barcelona.
Global context. Since mid June the EUR/GBP cross rate entered some kind of consolidation pattern. Sterling had come off from distressed levels recorded at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated and by improved global investor sentiment. However, there was a lot of uncertainty on the next steps in the BoE’s quantitative monetary policy and this capped the rebound of sterling. The early August BoE decision to raise the asset purchase program to £175B indicated that the Bank intended to maintain a loose policy for a prolonged period of time. Governor King’s preference for an even larger effort suggested that a change towards a tighter policy was still very far away and was a good reason to reduce sterling long exposure. The growing negative spread between UK and German government bonds at the short end of the yield curve is no help for the UK currency either. Throughout the month of August EUR/GBP returned to the higher area of the established 0.8400/0.8700 trading range.
The EUR/GBP currency pair is testing key resistance levels. A sustained break above the 0.8699 previous reaction high would suggest a deterioration in market sentiment toward the UK currency. The jury is still out on this break, but we belief that there is a decent chance that it will succeed. So we tend to join the established upmove in this pair. The first target of the double bottom formation with neckline at 0.8699 is seen at 0.8940.
