On Friday, all eyes in the market were on the US payrolls report. In the run-up to the report, EUR/USD hovered sideways in a tight range in the mid 1.42 area. However, the report was marginally better than expected but initially it was not able to give markets a clear direction. Stocks didn’t really know which way to go and the EUR/USD even dropped to 1.42 area. However, later in the session stocks found again a better bid and this changed also the course of events for EUR/USD. The euro, in a brisk move, regained the earlier losses (It was not the first time a see such a rather wild swing in EUR/USD after the close of the European markets recently). EUR/USD closed the session at 1.4297, compared to 1.4252 on Thursday.
Over the weekend, the Ministers of Finance from the G20 expressed the view that it is too early to withdraw stimulus. This was not really a surprise. The currencies as such were not really a big item at the G20. However, this environment of protracted fiscal and monetary stimulus apparently continues to give investors some comfort (risk appetite). Until further notice, this still continues to support the euro against the dollar.
Today, US markets are closed in observance of Labour Day holiday. In Europe, only the July German factory orders are on the agenda. So, we might expect rather thin trading conditions today. A good start of the Asian stock markets this morning helped EUR/USD to build out Friday’s gains this morning.
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 are allowing 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. 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.
On Friday, USD/JPY extended the rebound that started on Thursday morning. There were some nervous spikes on the charts at the time of the release of the US payrolls report, but after the all, the impact of the report on USD/JPY trading was limited. The strong close at the US stock markets also helped USD/JPY to end the session near the intraday highs. USD/JPY closed the session at 92.01, compared to 92.64 on Thursday evening.
This morning, Asian stock markets are tracking in the gains in Europe and the US on Friday. Global investors continue to feel confident that the global policy measures to support the economy will put a floor for the world economy in the months to come. With some technically important levels with striking distance, this apparently is enough a reason to scale back some yen long exposure against the dollar (and against most other major currencies).
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. Recently, USD/JPY hardly gained on a strong stock market performance while negative stock market corrections continued to support the yen. 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 positions. 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 further. We look to reinstall/add to USD/JPY short positions, but we’re not in a hurry to do so. From a technical point of view, the 95.00 area should not be that easy to surpass in the short-term perspective.
On Friday, EUR/GBP basically held a sideways trading pattern as the correction from the previous days slowed. There were no important eco data on the UK calendar. Order-driven trading in the major cross rates (cable and EUR/USD) caused the pair to reach a new reaction low in the 0.8705 area after the US payrolls report. However, global euro strength in step with the stock market rebound later in US trading also pushed EUR/GBP a few ticks higher again. The pair closed the session at 0.8722, compared to 0.8730 on Thursday.
Today, the UK calendar is almost empty. As US markets are closed today, one might expect thin trading conditions in sterling cross rates, too. Later this week, the UK calendar contains the production data (tomorrow), trade balance (Wednesday) and PPI on Friday. Markets will also take a look at the BoE interest rate decision. However, after last month’s decision to raise the amount of asset purchases we don’t expect any new initiatives at this stage.
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 to sell sterling. EUR/GBP cleared the top of the MT sideways trading range at the end of August. This break confirmed the deterioration in market sentiment towards the UK currency. This move ran into resistance in the 0.8840 area and some correction kicked in. Nevertheless, the (monetary) picture stays sterling negative. We maintain a buy on dips approach for EUR/GBP. The pair has come close to a first import support area (0.8700 area). Short-term players can look to gradually (re)-install EUR/GBP long exposure. The 0.8839/66 area (Reaction high/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.
