On Thursday, trading in the EUR/USD currency pair was initially confined within a very tight trading range. The pair set an intraday low in Asian due to stock markets weakness. The euro tried to regain some ground but profit taking at the open of the US stock markets capped the upside in EUR/USD and the cross rate returned to the intraday lows. The data (higher than expected German inflation data and better than expected US GDP growth and jobless claims) hardly left any trace on the EUR/USD charts. The same was true for the hawkish comments from Fed’s Lacker as he said the Fed should take into consideration that it might have waited too long to raise rates in 2003. So, it looked as if this would become a very dull session of EUR/USD trading. However, later in US trading the dollar fell of a cliff. The reason behind the move was not that obvious. The rebound on the stock markets and a steep rise in the oil price at that time played a role. Stop-tripping in thin trading conditions was also part of the explanation. Whatever the reason, EUR/USD briefly spiked from the 1.4275 area to test offers in the 1.4400 area. The pair closed the session at 1.4340 compared to 1.4255 on Wednesday evening. Looking at most other major cross rates, the move in the first place should be considered as underlying dollar weakness rather than euro strength. Even after yesterday’s brisk spike higher, EUR/USD is still holding within the barriers of the established sideways trading range. However, the least one can say is that yesterday’s price action is no vote of confidence in the US currency.
Today, the eco calendar contains the confidence indicators from the European Commission. Markets will look out whether they will confirm the improvement seen other indicators. Usually these data have hardly any impact on the currency market. In the US, the spending and income data and the (Final) Michigan consumer confi-dence are scheduled for release. Once again, one might expect any impact on the currency market to go via the stock markets.
Global context. Since early June, the EUR/USD currency pair has been locked in a lackluster, sideways trading pattern. Monetary policy makers on both sides of the At-lantic are in the phase of executing the conventional and non-conventional measures that were put to address the financial and economic crisis. Recently, there were en-couraging 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 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, dur-ing 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 trad-ing 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 1.4448 area early in August. However, this move didn’t really challenge long-standing sideways trading pattern. We do not front run on a break out of this estab-lished sideways trading pattern between 1.4000 and 1.4450. Short-term players can continue to try to exploit this range. Nevertheless, the least one can say after yester-day’s price action is that the dollar is not really in great shape. We’re not in a hurry to install EUR/USD short positions and wait to see whether the 1.4450 resistance holds.
On Thursday, the picture for the USD/JPY currency pair continued to look heavy. The pair already revisited last week’s lows in the 93.40 area early in the session on Asian stock markets weakness. However, no break occurred. In US trading, the bet-ter than expected US data (GDP and claims) caused a temporary rebound. The hawkish comments from Fed Lacker might have played a role, too. However, a profit-taking move on the stock markets pushed USD/JPY back to the intraday lows. The global USD sell-off later in US trading even pushed the pair temporary below the key 93.40 area. For now, the test was rejected and USD/JPY closed the session at 93.52, compared to 94.26 on Wednesday.
This morning the Japanese calendar was well filled. Labour market data and house-hold spending came out on the weaker side of expectations. The inflation data (-2.2% of the national July figure) were more or less in line with expectations but con-tinued to indicate that the deflation risk is still looming. Core inflation measure (-2.2% Y/Y for the core, -0.9% for the figure excluding food and energy) are at record/multi-year lows. Analysts are trying to asses the impact of an expected victory of the De-mocrat Party at this weekend’s parliamentary elections. However, at least for now this potential historic U-turn on the Japanese political scene is having no big item currency trading. The day-to-day gyrations on the stock markets remain the main driver.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area 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 (intraday) link between USD/JPY and the swings in global investor risk appetite and risk aversion. However, 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 sustained break below the ST lows at 93.42/20 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. The reaction to the eco data illustrated the poor underlying sentiment towards the UK currency. Better than expected UK house prices failed to support the UK currency. Poor Q2 invest-ment data and mixed CBI distributive trades report were enough a reason to further offload sterling long exposure. The pair reached intraday highs in the 0.8839 area in US trading. The pair closed session at 0.8807, compared to 0.8772 on Wednesday.
Overnight, the GfK consumer confidence came out unchanged from July at -25. This was slightly below the market consensus. Later today, markets will look out for the preliminary UK GDP figures. A negative surprise/downward revision might add to the sterling negative sentiment.
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. How-ever, 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 good reason sell sterling. EUR/GBP returned to the higher area of the 0.8400/0.8700 trading range and cleared this hurdle earlier this week. This break confirmed the 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 charts. The first target of the double bottom formation with neckline at 0.8699 is seen at 0.8940.
