Yesterday was again a very calm session for EUR/USD trading. The commitment of the G20 policy makers not to remove policy stimulation in the near future added to the positive investors’ sentiment and supported also EUR/USD. The euro remained well bid but the EUR/USD currency pair was not able to clear the technical barrier in the 1.4370/1.44 area. The absence of any guidance from the US dampened activity and the European eco data (German factory orders), as usual, had no lasting impact on EUR/USD trading. The pair closed the session at 1.4332, compared to 1.4297 on Friday.
Today, the calendar is again rather thin. In the US, only some second tier data are scheduled for release. The 3-year US auction is an interesting feature for bond in-vestors, but auctions (especially of short term paper) had recently hardly any impact on currency trading. The German trade balance figures and industrial production data are no market movers either. It is becoming very boring, but watching the stock markets will once again be the name of the game.
Global context. Since early June, the EUR/USD currency pair has been locked in a 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 en-couraging 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. Currency in-vestors still have to look for other trading themes to guide the price action. The swings in risk appetite/risk aversion were and are still the most obvious alternative. The dollar and the yen are supposed to experience an exit of safe haven flows in fa-vour of the euro and other ‘riskier’ currencies when global investor sentiment is im-proving. However, recently, 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. Nevertheless, the least one can say is that dollar doesn’t look like being at the eve of a major comeback.
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. 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 Monday, USD/JPY didn’t know which way to go. USD/JPY was well bid in Asia and early in Europe on a decent stock market performance. However, once again, the dollar was fighting an uphill battle. Despite the European stock markets holding up very well, USD/JPY even gave back the early gains to touch intraday lows in the 92.85 area after the close of the European markets. USD/JPY closed the session at 93.08, little changed from the 93.01 close on Friday evening.
This morning, Asian stocks show again moderate gains. The Japanese eco data in general were slightly disappointing with the Eco watchers survey and the current ac-count figures coming out on the weaker side of expectations. Bank lending data showed a further slowdown, too. USD/JPY dropped again below the 93.00 this morn-ing. A less euphoric attitude of global investors might play a role. However it is also another signal of underlying dollar weakness, something which is also visible in the trade weighted dollar index, which testing the recent lows.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. However, despite a positive global investor sentiment the US currency could not hold on to its gains against the yen. This indicates underlying dollar weakness. Often, 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 has become some-what asymmetric. Recently, USD/JPY hardly gained on a strong stock market per-formance while negative stock market corrections (or even a slowdown in the rise of the stock markets) 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 advo-cated profit-taking on USD/JPY short positions. Longer term, we don’t expect a strong rebound of the USD dollar against the yen. 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 perspec-tive. However, looking at the price action over the previous sessions, a rebound to that area is far from evident.
On Monday, EUR/GBP extended the rebound after setting a new short-term low just above the 0.87 mark on Friday. Price action was very much order driven and techni-cal in nature. Stop tripping in cable after the close of the European markets (which was not matched in EUR/USD) caused EUR/GBP to test offers in the 0.8780 area. Aside from those technical factors, investor uncertainty ahead of Thursday’s BoE meeting might have played a role too. The pair closed the session at 0.8768, com-pared to 0.8722 on Friday.
Today, the UK production data are scheduled for release. The market is expecting a very moderate improvement. From a currency point of view, we have the impression that there is no room for bad news ahead of the BoE. This morning, the BRC retail sales monitor came out at a disappointing reading of -0.1% (from 1.8% July). At least for now, the damage for sterling is limited. Nevertheless, we don’t see much room for a sustained rebound of the UK currency ahead of the BoE meeting.
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 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. The 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. At the end of last week, the pair has come close to a first import support area (0.8700 area). This test was rejected. Short-term players can look to gradually (re)install EUR/GBP long exposure. The 0.8839/66 area (Reac-tion 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.
