On Wednesday, watching the stock markets was still the name of the game for EUR/USD traders. However, as already had been the case a few times in the recent past, the link between stocks and EUR/USD was not really one on one. European stocks tried to extend their rally early in the session and pushed EUR/USD to intraday highs in the 1.4345 area. This time however, the positive momentum could not be maintained, not even by a (much) better than expected German Ifo release. Apparently enough good news had been priced in after the recent rally. What can’t go up, must come down. European stocks faced some (albeit very moderate) profit taking after the release and this dragged also EUR/USD lower. The correction accelerated as soon as US traders joined the action. Later in the session, better than expected US durable orders and new home sales gave stocks some downside protection, but EUR/USD was not able to recoup the earlier losses. Some ST euro longs apparently were wrong-footed by the (temporary) disproportional EUR/USD loss compared to the limited correction on the (European) stock markets. EUR/USD closed the session at 1.4255, compared to 1.4296 on Tuesday evening.
Today, the eco calendar contains the German inflation data, the preliminary release of the Q2 US GDP and the US weekly jobless claims. Later in the session, the US Treasury will auction $28B of 7 year bonds. The US GDP release and the claims (via the stock markets) might have some intraday impact on EUR/USD trading. However, we don’t expect them to really change the course of events. Global investor sentiment and the stock market performance will continue to guide the EUR/USD price action short-term. In this respect, investors keep a close eye on the developments on the Chinese stock markets. Uncertainty on how China will handle the massive credit expansion from the first half of the year might become a factor of global uncertainty. If so, in the current market environment, it could cap the upside of the euro and support the dollar and the yen.
Global context. 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 nonconventional 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. In a day to day perspective, we have the impression that the topside in this pair is becoming a bit more difficult.
On Wednesday, USD/JPY held a tight sideways trading range roughly between 93.90 and 94.55. There was a brief uptick after the better than expected US data. However, in line with the price action on the stock markets, the gains could not be sustained. USD/JPY closed the session at 94.26, little changed from the 94.18 close on Tuesday.
This morning, Asian stocks markets show some moderated losses which supports the yen against the dollar.
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 the swings in 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. One other remark: interest rate differentials currently are no major issue for the currency market. Nevertheless, the fact that the US dollar and JPY interest rates are equal is no support for the dollar. This is obviously no carry trade anymore. A break below the ST low at 93.42 could reinforce the downward momentum in this pair and open de way for a retest of the 91.73 July low.
On Wednesday, the slide of sterling against the euro continued. There was no hard news to explain the move. However, Monday’s break above the key EUR/GBP 0.87 range top obviously improved the medium term picture in this cross rate and supported follow-through price action on this break. The pair even tested the 0.88 market at the end of the European trading session before some profit taking kicked in. EUR/GBP closed the session at 0.8772, still a decent gain compared to 0.8746 close on Tuesday evening.
This morning, the Nationwide house prices came out at a 1.6% rise M/M. The Y/Y decline in house prices slowed from 6.2% to 2.7%. The release was better than expected. Later today, the CBI distributive trades are scheduled for release. Over the previous weeks, sterling trading was primarily driven by investors’ assessment of the BoE’s monetary policy. It will be interesting to see whether eco data (especially in case they area better than expected) will be able the curb the negative sentiment toward to UK currency. At least for now, we don’t fell like betting on a major comeback of sterling anytime soon.
Global context. Since mid June the EUR/GBP cross rate entered some kind of consolidation pattern. Sterling had come off from distressed levels 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 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. We maintain a buy on dips approach for EUR/GBP. 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.
