On Friday, EUR/USD was again locked in a rather thigh sideways trading range for most of the day. The eco data brought no high profile news for the currency market. European stocks underpinned the single currency early in the session but this positive momentum faded as soon as US traders joined the price action. As was the case on Thursday, there was again a ‘strange’ spike after the close of European markets. A few sell orders in a thin market this time sent the pair below the 1.43 mark. The pair closed the session at 1.4303 compared to 1.4341 on Thursday.
Today, the eco calendar contains the European flash CPI estimate for the month of August. In the US, the Chicago PMI is scheduled for release. The latter is expected the show a rather forceful improvement. However, we doubt that it will have a lasting impact on global markets in general and on the currency market in particular. Markets probably will wait for the key indicators (ISM, ADP payrolls) later this week. The Chinese stock markets show rather steep losses this morning. This keeps EUR/JPY under pressure and, through cross rates, it might weigh on EUR/USD, too, especially if the weakness on the Chinese stock markets would filter through into the European and/or the US 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 Atlantic 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 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 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 still have 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 1.4448 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. A real test of the 1.4450 area didn’t occur at the end of last week. A break below the 1.4200 area (recent short-term lows) would open the way for return action toward the ST range bottom in the 1.4000/50 area.
On Friday, yen traders were in a wait-and-see mode ahead of the parliamentary elections. USD/JPY received support from the performance of equities in Europe and tested the 94.00 area. However, in the US, investors were less euphoric and this caused USD/JPY to return the early gains later in the session. USD/JPY closed the session at 93.60, little changed from the 93.52 close on Thursday.
This morning, the victory of the Democratic Party takes center stage. The yen gained some ground on these headlines and the break below the 93.20 breakdown area caused some additional USD/JPY stop loss selling. There is still a lot of uncertainty on the specific policy measures the new government will take to address the economic crisis. The budgetary room is very limited, but at least for now the focus on domestic demand apparently is seen as (cautiously) positive for the Japanese economy and the for the yen. Aside from the outcome of the Japanese elections, the rather steep losses on the Chinese stock markets added to the yen positive sentiment. There were also a lot of eco data on the calendar in Japan this morning (industrial production, retail trade data, housing starts, construction orders). However, as usual they had hardly any impact on yen-trading.
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, 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. Last week, we had a sell-on upticks approach for USD/JPY. We hold on to that bias. This morning’s break below the ST lows in the 93.20 area reinforces the downward momentum in this pair and opens de way for a retest of the 91.73 July low.
On Friday, the decline of sterling against the euro slowed. Sterling was already better bid at the start of the session and the (slight) upward revision of the UK Q2 GDP was a good reason to cash in some gains on sterling shorts. However, after all, the correction remained very limited. EUR/GBP slipped to the 0.8775 area around noon. Later in the session, the pair hovered up and down, roughly between 0.8780 and 0.8820 and closed the session at 0.8790, compared to 0.8807 on Thursday.
Overnight, the UK hometrack housing survey showed a rise of 0.1% M/M of UK house prices (and a slowing in the Y/Y decline from 7.7% to 6.7%). This survey confirms evidence from other indicators the UK housing market might have hit the bottom. Sterling gained temporary after the publication of the release. However, the gains could not be sustained during the Asian trading hours. Later today, the UK eco calendar is empty. Deterioration in global investor/stock market sentiment (cf. poor performance of the Chinese stock markets) probably won’t be of any help for sterling.
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, lingering uncertainty on the BoE’s quantitative monetary policy 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 last week. This break confirmed the deterioration in market sentiment towards the UK currency. On Friday, the sterling decline slowed. 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.
