On Friday, the EUR/USD currency pair remained well bid. However, as was already the case on Thursday, the momentum of the rally slowed. Global investor sentiment was supported by a set of comforting eco data in China on Friday morning. Currency traders didn’t change tactics and continued to sell the dollar against most other major currencies. EUR/USD set a new reaction high at the start of trading in Europe and a new attempt to break higher occurred early in US trading. ECB’s Juncker indicating that the current strength of the euro was not a big threat to the economy added to the euro positive sentiment. In the US, the Michigan consumer confidence came out above consensus. Stocks and EUR/USD tried to move higher but the move failed. The indicator as such is not really that important, but Friday’s price action might be an indication that the recent rally is running out of fuel. The major stock market indices came off from the intraday highs and this blocked also the ascent of EUR/USD. EUR/USD closed the session at 1.4571, little changed from the 1.4582 close on Thursday.
Today, the eco calendar is thin. In the US, no important data are scheduled for release. In the EMU, EU Commission’s interim growth forecasts are interesting. They will probably also mirror recent evidence that the prospects for the European economy are improving. However, the question is whether this will have an impact on global markets. Later today, several Fed members will speak including Fed’s Yellen on the economic outlook.
Global context. Since early June, the EUR/USD currency pair had been locked in a sideways trading pattern. Recently, there were encouraging signs that the worst of this crisis might be over. However, the Fed and the ECB recently indicated that the current stimulating monetary policy will remain in place for an extended period of time. So, interest rate expectations/interest rate differentials do not offer a clear guide for EUR/USD trading and this probably won’t be the case anytime soon. By default, swings in risk appetite/risk aversion were the most obvious alternative to guide the price action on the currency markets. In this context, a decline of the dollar was often considered as a signal of improving global investor sentiment. On top of that, in this low yield environment, the dollar apparently has become the preferred currency to fund carry-trade like deals. However, recently, the market focus gradually turned also more to dollar weakness. The huge US financing needs together with the Fed’s intention to run an expansionary monetary policy for a pronged period of time have put the dollar in a vulnerable position. In a longer term perspective, we don’t see many reasons to turn dollar positive before it would become clear that the Fed will take the lead in taking back monetary policy stimulation. We don’t have any indication that this will happen anytime soon. In a day-to-day perspective, there might be room for some consolidation on the recent rally. This might also (temporary) cap the rebound in EUR/USD. However, as we don’t see a forceful correction on the liquiditydriven rally, the correction in EUR/USD might be limited, too.
Looking at the technical charts, the EUR/USD currency pair set a minor new high in the 1.4448 area early in August, but at that time no follow through price action occurred. However, earlier last week EUR/USD cleared the previous range top and this break obviously improved the picture for EUR/USD. The 1.4719 December high is now the last area of defense. The pair shows some ST signs of topping out (doji-like signal on Friday). Nevertheless, the LT picture remains EUR/USD constructive. A buy-on-dips approach is still preferred. We continue to protect all USD long exposure. A break above the 1.4719 area could still pull the trigger for some kind of dollar panic.
On Friday, the decline of the dollar against the yen continued almost without any interruption. The break below the 91.75/60 support area reinforced the downward spiral in this pair. A mixed performance of major equity markets was not enough to block the ascent of the yen. USD/JPY set a new reaction low in the 90.20/25 area. There was a limited technical rebound going into the weekend. USD/JPY closed the session at 90.71, still a loss of one yen compared to the 91.73 close on Thursday. It was also a bit remarkable to see the yen making quite a decent gain against the euro while sentiment on global stock markets remained constructive after all.
This morning, most Asian stock markets record moderate losses, with Japan again hit the hardest. Chinese stock markets are the exception and are showing small gains. Interesting, this morning USD/JPY is apparently inclined to join the rebound of the dollar of the likes of the Aussie, kiwi or the euro, despite the correction on the Japanese stock markets. Markets might also become a bit nervous that the recent rally in the yen might cause some uneasy with the Japanese authorities. Some verbal interventions might be around at corner.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar could not hold on to its gains against the yen. This indicated underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite even became somewhat asymmetric. USD/JPY hardly gained on a strong stock market performance while negative corrections (or even a slowdown in the rise of the stock markets) continued to support the yen. Apparently, the dollar (and not the yen) has become the preferred funding currency for carry trades. Recently, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73 level was a high profile support level). Nevertheless, the odds for a sustained USD/JPY rebound are far from bright. So, this remains a sell-on-upticks environment. The short-term reaction high at 93.30 now is the first technical resistance area. Even as the USD/JPY currency pair is showing some tentative signs of that the decline is slowing this morning, the red alert for the dollar is still on. The year lows in the 0.8710 area might come in the picture soon.
On Friday, the rebound of sterling against the euro that started after Thursday’s BoE policy meeting slowed. This confirms our view that this post BoE move was mostly technical in nature, as the BoE meeting as such didn’t bring any new info on the BoE policy approach going forward. EUR/GBP reached an intra-day low after the UK PPI data, but after all the release was too close to expectations to have a lasting impact on EUR/GBP trading. EUR/GBP closed the session at 0.8747, little changed for the 0.8754 on Thursday.
Today, the UK calendar is empty.
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. 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 and Governor King’s call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This was a 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. At the September meeting, the BoE took no additional policy steps. This triggered a brief sterling rebound at the end of last week. Nevertheless, the (monetary) picture stays sterling negative. We maintain a buy-on-dips approach. The 0.8700 area is still the first important short-term support. The 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. 4
