On Tuesday, the euro was again well bid against the US dollar, supported by ongoing positive investor sentiment. EUR/USD tumbled from 1.43 to the 1.4250/55 area at the start of trading in Europe due to weakness on the stock markets in Asia and early in Europe. However, the losses on the European stock markets were limited and were already reversed during the morning session. EUR/USD tracked this reversal and the break above the 1.43-mark triggered some stops on EUR/USD shorts. EUR/USD reached intraday highs in the 1.4360 area as better than expected US housing data and consumer confidence reinforced investor optimism. However, the move (both in stocks and in EUR/USD) could no be extended. Some profit taking kicked in and EUR/USD closed the session at 1.4294, little changed compared to the 1.4304 close on Monday. So, the price action on the stock markets was again the guide for intra-day EUR/USD price action. However, in a longer term perspective trading in EUR/USD is still confined by the long standing trading ranges.
Today, the eco calendar contains the German Ifo release and the US durable orders and new home sales. The three indicators are expected to show a further improvement. In theory this should be good news for the equity markets and thus also for the EUR/USD currency pair. However, recently already quite some good news had been priced in. Question is whether markets will continue to react as forceful as they did in the recent past. Nevertheless, the downside in EUR/USD looks rather well protected as long as investor optimism persists. In this environment, we continue keep and eye at the EUR/JPY price action to asses any potential change in sentiment on EUR/USD, too.
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 an extended 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 still 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 front run 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 Tuesday, USD/JPY continued to track the intraday swings in global stock market sentiment. The pair reached an intraday low in the 93.80 area early in the session but reversed the early losses as US and European stocks move higher again supported by better than expected US data. Some profit taking on the US stock markets later in the session caused USD/JPY return lower in the intraday trading range. The pair closed the session at 94.18, compared to 94.56 on Monday evening.
This morning Japan’s trade data showed a mixed picture (the Y/Y decline in exports rose from -35.7% to -36.5%). Corporate services prices came out in line with expectations at -3.4%. Asian/Japanese stocks showed moderate to decent gains and this provides USD/JPY some downside protection this morning.
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, 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 Tuesday, EUR/GBP extended its gains from the previous sessions, confirming the break of the key 0.8700 area that occurred on Monday evening. The driver behind the price action hadn’t changed. The negative interest rate spread between sterling and the euro at the short and of the curve and the market assessment that the BoE will continue to run an ultra loose monetary policy for a protracted period of time continue to weigh on the UK currency. Uncertainty on the health of the UK financial system might continue to play a role, too. EUR/GBP moved higher throughout the European trading session, reaching intraday highs in the 0.8765 area around the close of the European session. Some profit taking kicked in after the European hours (more or less in step with EUR/USD). Nevertheless, the pair still closed the session at 0.8746, compared to 0.8711 on Monday evening.
After the European trading hours, BoE Depty Governor Bean said that the initial responses to the BoE policy measures (asset purchases) were moderately encouraging. He also indicated that it would take quite a long period to draw conclusions on the efficacy of these measures.
Today, the UK eco calendar is empty.
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 remained 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. EUR/GBP returned to the higher area of the established 0.8400/0.8700 trading range and cleared this hurdle earlier this week. This break indicates deterioration in market sentiment towards the UK currency. After the recent steep sterling losses some consolidation may occur. Nevertheless, the picture stays sterling negative. So, we continue to join the established upmove in this pair. The 0.8866 area (June high) is the next high profile resistance on the chars. The first target of the double bottom formation with neckline at 0.8699 is seen at 0.8940.
