On Wednesday, EUR/USD traders experienced a rather uneventful trading session. After the steep sell-off on Tuesday, EUR/USD settled in a tight sideways trading pattern, roughly between 1.4290 and 1.4250 for most of the day. The eco data (US ADP labour market report and factory orders) only had a very limited and temporary impact on global markets and on EUR/USD trading. US stocks struggled at the open. However, the losses were moderated and there was no follow through price action. EUR/USD tested the intraday lows early in US trading. However, no break could be forced and this pulled the trigger for the pair to go the other way. Some ST stops were hit as the pair moved above the morning highs in the 1.42545 area. The pair reached intraday highs in the 1.4290 area. The Minutes of the previous Fed meeting brought no new info either. The pair closed the session at 1.4264 compared to 1.4224 on Tuesday. So, the currency pair showed again some intraday swings, but as is already the case for a long time, the global picture hasn’t changed.
Today, in Europe, the final release of the Services PMI will be published. On top of that, the ECB will announce the outcome of its policy meeting and ECB president Trichet will comment on the decision at the monthly press conference. In the US, the ISM non-manufacturing and the weekly jobless claims are scheduled for release. Regarding the eco data, recently, they had often no lasting impact on global markets and thus on the currency market. We expect a similar reaction to the nonmanufacturing ISM and the claims, especially as markets are looking forward to tomorrows US payrolls. The ECB press conference will get ample attention. The markets have come to the conclusion that the ECB and the Fed are in a similar situation and that they are obliged to keep rates at an extremely low level for a prolonged period of time. This is one of the major reasons for the deadlock in EUR/USD. We don’t expect Trichet to challenge this assessment at today’s press conference.
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.
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. At the end of last week, EUR/USD came within striking distance of the 1.4450 area, but a real test didn’t occur. 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 on EUR/USD shorts to protect a potential break above the 1.4450 area.
Yesterday, the yen performed a gradual rise against the dollar throughout the session. The decline on the Asian and the European stock markets supported the Japanese currency. The move slowed later in US trading as the losses on the US stock markets remained rather well contained. Nevertheless, the pair closed the session near the intraday lows at 92.22, compared to 92.92 on Tuesday.
This morning, most Asian stock markets showed a mixed picture. The Japanese indices are slightly in the red. Most other indices are in positive territory, with China taking the lead. USD/JPY tested the 92 big figure early in the session but is clearly off the lows at the moment of writing. EUR/JPY is also trying to leave yesterdays lows in the 131 area behind.
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 row against the tide yet, but we have the impression that the easiest part of the yen gains against might be behind us. On top of that, the pair is coming very close to the key 91.75 support area (July lows). This is/was our long-term target. In this context (partial) profit taking on USD/JPY shorts is a viable option.
On Wednesday, the UK currency entered calmer waters and sterling succeeded to achieve a small rebound against the single currency. The construction PMI (up from 47.00 to 47.70) was very close to expectations and had no lasting impact on sterling trading. We consider yesterday’s move as corrective in nature. We don’t make too much out of it, but the fact that ST yields in the UK (government bonds) were slightly higher compared to Tuesday’s lows might have been a good excuse to lock in some profits on sterling shorts. Whatever the reason, EUR/GBP closed the session at 0.8763, compared to 0.8802 on Tuesday evening.
Today, the UK calendar contains the services PMI. Earlier this week, an unexpected decline in the manufacturing measure had had no (lasting) negative impact on sterling. The consensus is expecting a moderate further improvement from 53.2 to 54.0. It will be interesting to see the reaction of sterling, especially in case of a weaker than expected figure.
Global context. Since mid June the EUR/GBP cross rate entered a 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 and yesterday a moderate correction kicked in. Nevertheless, the (monetary) picture stays sterling negative. We maintain a buy on dips approach for EUR/GBP (0.8700 area is the first important support area short-term). 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.
