On Monday, EUR/USD started the day on a weak footing. The pair slipped to intraday lows in the 1.4260 area. The steep decline on the Chinese stock markets caused a selling wave in EUR/JPY and this filtered also through into EUR/USD. However, there was no follow-through price action as the losses on the European stock markets stayed rather limited. Later in the session, the Chicago PMI came out better than expected, but this had hardly any impact stocks and on EUR/USD. However, the pair spiked higher and a few minutes later, the move coincided with the publication of a much better than expected Milwaukee PMI. We are a bit skeptic to see this data series as the real cause for the move, especially as the enthusiasm in EUR/USD was not mirrored in the price action on the stock markets. On top of that, there were already a few strange EUR/USD moves at the end of last week. Whatever the reason, EUR/USD rebounded to the mid 1.4350 area and held on to most of its gains. The pair closed the session at 1.4334, compared to 1.4303 on Friday evening. Recently, we already indicated a few times that we were not impressed by the performance of the US currency. Yesterday’s price action only reinforces this feeling.
Today, the eco calendar heads up with the German retail sales, the final EMU PMI and the EU unemployment rate. In the US, markets will look out for the manufacturing sector. A reading well above the 50 mark for the ISM could reinforce investors’ feeling that the (US) economy is (gradually) heading toward recovery. At some point, in theory, this should support the dollar. However, this is obviously not the way the market has been reacting recently. Good news, even when it came from the US, most often tended to support the euro rather than the dollar. At least for now we don’t have any indication that this will change anytime soon.
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. However, the least one can say is that the US currency was really in great shape recently.
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. A real test of the 1.4450 area didn’t occur at the end of last week, but the EUR/USD is still being traded within striking distance of the range top. Short-term players can continue to try to exploit this range. However, given the unconvincing performance of the dollar recently, we put tight stop-loss protection to protect a potential break above the 1.4450 area.
Yesterday, the yen posted a strong performance at the start of trading in Asian. The victory of the Democratic Party and the steep decline on the Chinese stock markets supported the Japanese currency. The pair tested intraday lows in the 9255/60 area. Later in the session, the decline on the European and the US stock markets was moderate and this slowed the decline in USD/JPY. The pair closed the session at 93.12, compared to 93.60 on Friday evening.
This morning, the Japanese vehicle sales came out in positive territory (2.3% Y/Y) for the first time since April 2008. Asian stocks (including the Chinese indices) are showing moderate gains this morning. This is providing the USD/JPY currency pair some downside protection. However, at least for now the dollar is again not really able to record any spectacular gains.
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. Already for some time, we have a sell-on upticks approach for USD/JPY. We hold on to that bias, even if we could see some consolidation if stock markets sentiment was to improve short-term. Yesterday’s break below the ST lows in the 93.20 area reinforced the downward momentum. The 91.73 July low remains the next high profile target on the charts.
On Monday, EUR/GBP trading entered a short-term consolidation pattern, digesting the gains for the previous weeks. The pair was captured in a sideways trading pattern between 0.8790 and 0.8820. There were no important UK eco data to guide the price action (except for the better than expected hometrack housing survey that was already published before the open of the European markets). The pair closed the session at 0.8801, compared top 0.8789 on Friday evening.
Today, the UK lending and money supply data and the UK PMI for the manufacturing sector are scheduled for release. The Bank of England is keeping a very close eye on the lending data. Poor figures might raise speculation that the BoE might still raise its liquidity proving measures. The PMI for the manufacturing sector is expected to come out above the 50 boom-or-bust level for the second month in a row. In theory this should be a positive factor for the UK currency. However, recently positive eco data often had only a limited impact on the UK currency. The monetary develops were more important.
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. At the end of last week 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
