On Tuesday, watching the stock markets was again the name of the game for EUR/USD traders. However, those stock markets initially didn’t really know which way to go. EUR/USD reached intraday highs in the 1.4378 area at the start of trading in Europe as European equity markets tried to extend the (albeit moderate) gains in Asia. However, the gains could not be maintained and the correction on the equity markets dragged EUR/USD lower. There was a temporary improvement in global investor sentiment early in US trading supported by the better than expected US ISM and pending home sales. This blocked temporary the correction on the stock markets and in EUR/USD. However, this time the US data were not really able to change the course of events and a new wave of profit taking hammered EUR/USD. The pair dropped from the 1.43 area to intraday lows below the 1.42 mark. The pair closed the session at 1.4224, compared to 1.4334 on Monday evening.
Today, in Europe, the final release of the EMU GDP data will be published. In the US, the ADP labour market report, the productivity data and the factory orders will be published. Later in the session, Fed’s Lockhart speaks on lessons of the financial crisis and the Minutes of the August FOMC meeting will be published. From a currency point of view, the ADP report probably has most potential to move the markets and EUR/USD trading. Once again, the reaction in EUR/USD will be highly dependent on the reaction on the equity markets. In this respect, one can raise the question whether a better than expected ADP report will be enough to block the correction that started earlier this week.
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 in place 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. Yesterday, the dollar finally managed to regain some ground versus the single currency. However, the trade weighted dollar is still close to the recent lows.
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 until yesterday, EUR/USD was 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 continue to put stop-loss protection to protect a potential break above the 1.4450 area.
Yesterday, the yen showed a mixed picture. The Japanese currency posted rather strong gains against the euro, but its performance against the dollar was far less spectacular. USD/JPY held up rather well early in European trade (despite downward pressure on equities) and the pair even reached an intraday high in the 93.40 area after the better than expected US data. The pair lost some ground in step with the stock market decline later in the session. However, this time the correction of the US currency was rather limited. Is this a first indication that the easy gains of the yen against the dollar are over? The pair closed the session at 92.92 compared to 93.12 on Monday evening.
This morning, most Asian stock markets joined yesterday’s decline in the US and Europe (Japan hit the hardest). However, in general the losses are not that heavy. USD/JPY touched lows in the 92.55 area this morning, but at least for now there is no follow through price action.
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 don’t change tactics yet. However, yesterday we had the impression that the downward momentum in USD/JPY is becoming less heavy. On top of that, the pair is coming closer to key support levels (91.75 area). This is/was our long-term target. (Partial) profit taking in case of a test of this area can be considered.
On Tuesday, the UK manufacturing PMI was the key factor for sterling trading. EUR/GBP dropped temporary below the 0.8800 mark early in the session. However, the release of a disappointing PMI from the manufacturing sector (unexpected decline from 50.2 to 49.7) hammered sterling. ERU/GBP jumped to an intraday high in the 0.8830/35 area after the release. However, this time there was no follow through price action and later in the session EUR/GBP even ceded some ground (EUR/USD driven). The pair closed the session at 0.8802, almost unchanged from the 0.8801 close on Monday.
Today, the UK calendar is thin with only the construction PMI scheduled for release. Usually this data series is not an important factor for the currency market.
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. Since the end of last week, the decline of sterling slowed. Nevertheless, the (monetary) 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.
