On Thursday, EUR/USD showed some intraday volatility but, after all, the changes were again very limited. EUR/USD trended cautiously higher during the European morning session and early in the US. The gains of the European stock markets were far from impressive but the positive sentiment gave EUR/USD some support and the pair tested offers in the 1.4345 area early in US trading. At the ECB press confer-ence, ECB president Trichet sounded a bit more optimistic on the economy, but this was not enough for additional follow-through gains of the single currency. On the contrary, during the US trading session the gains could not be maintained. US data (claims and ISM non-manufacturing) were mixed and EUR/USD lost one big figure as US stocks took a rather poor start. A late session stock market rebound in the US was not able to push EUR/USD higher again. The pair closed the session at 1.4252, little changed from the 1.4264 on Wednesday.
Today, all eyes will be on the US payrolls report. After last month’s better than ex-pected report, the consensus is expecting a more moderate improvement. The ADP report earlier this week disappointed, but over the previous months the correlation between the payrolls and the ADP was not really that strong. Maybe, there is still room for a positive surprise. Recently, the reaction of the currency market to eco-nomic data most often occurred via the reaction on the stock markets. In this para-digm, goods news, even of it came from the US, was good for the euro and a nega-tive for the dollar. This pattern can not last till eternity. However, as long as the im-provement of the data doesn’t change the markets’ assessment on the timing of the withdrawal of monetary policy stimulus, this kind of market reaction might persist. In this respect, we think that it is still too early to expect a positive outcome of the pay-rolls to trigger a trend reversal in favour of the dollar. So, a surprise can cause some intraday volatility, but we don’t expect it to unlock the stalemate that is already in place for quite some time.
During the weekend, the G20 finance minister will meet in London. The focus will most probably be on measures to support the economic recovery. We don’t expect currency markets to be a big item.
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 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 in-flation 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 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. At the end of last week, EUR/USD came within striking distance of the 1.4450 area, but a real test didn’t oc-cur. 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 protec-tion on EUR/USD shorts to protect a potential break above the 1.4450 area.
Yesterday, USD/JPY set a correction low in the 91.95 area early in Asian trading. A real test of the key 91.73 support didn’t occur and the pair changed course. This cor-rection was supported by an, albeit moderate, rebound on the Asian and European stock markets. Technical considerations also played a role as the pair extended its rebound, even when stocks struggled at the start of the US trading session. USD/JPY closed the session at 92.64, compared to 92.22 on Wednesday evening.
This morning, Asian stock markets showed again a mixed picture. The Japanese in-dices are slightly in the red. Most other indices show very moderate gains. USD/JPY is holding close to yesterday’s closing levels.
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 dol-lar 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 some-what asymmetric. USD/JPY hardly gains on a strong stock market performance while negative stock market corrections continue to support the yen. Over the previous weeks, we had a sell-on upticks approach for USD/JPY. However, as the pair came close to the key 91.73 support we advocated profit-taking on USD/JPY short posi-tions. Longer term, we don’t expect a strong rebound of the USD dollar against the yen. However, in a day-to-day perspective the correction can still go somewhat fur-ther. We look to reinstall/add to USD/JPY short positions, but we’re not in a hurry to do so.
On Thursday, EUR/GBP extended the correction of that started earlier this week. The rebound of the UK currency was supported by a better than expected UK Ser-vices PMI. However, technical considerations (ST profit taking, unwinding of over-bought conditions) played a role too. The pair closed the session at 0.8730, com-pared to 0.8763 on Wednesday.
Today, the UK calendar is almost empty, with only the new car registrations on the agenda.
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 ster-ling. 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 to 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 sen-timent towards the UK currency. Since the end of last week, the decline of sterling slowed and 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.
