On Friday, there were no important data from the major economies and stocks didn’t really know which way to go. So, there was also no clear guide for EUR/USD trading. EUR/USD traders as usual kept an eye on the intraday gyrations of the stock mar-kets, but after the all the pair was stuck in a rather tight sideways trading pattern. Over the previous weeks, there had been quite some building up USD-short posi-tions and this excess of USD shorts also made it difficult of the EUR/USD to gain momentum to break above the key 1.4720/67 area in a sustainable way, especially as there was no an obvious trigger to do so. On top of that, one might also expect that short-term players squared some positions ahead of the long weekend in Japan and going into this week’s Fed policy meeting. So, EUR/USD closed a rather un-eventful trading session slightly lower at 1.4712, compared to 1.4741on Tuesday evening. In
Today, the calendar of eco data is again very light. In Europe there are no important data scheduled for release. In the US only the August leading indicators will be pub-lished. Most often, this indicator has only limited impact on the currency markets. In a short-term perspective, we have the impression that the recent uptrend, both in EUR/USD and on the equity markets, is losing some power. Investors might also be-come a bit cautious ahead of this week’s FOMC meeting. The Fed will most probably confirm its commitment to maintain policy stimulation for a prolonged period of time. Nevertheless, any hints that they are gradually shifting their attention to the next phase in this policy cycle might create some nervousness at the short end of the US yield curve. With the market a bit overextended toward dollar short positions, these considerations might be a good reason for a moderate technical rebound of the USD at the start of this new trading week.
Global context. Since early June, the EUR/USD currency pair had been locked in a sideways trading pattern. There are signs that the worst of the global crisis might be over. However, the Fed and the ECB still indicate that the current stimulating mone-tary policy will remain in place for an extended period of time. So, interest rate ex-pectations/interest rate differentials do not offer a clear guidance for EUR/USD trad-ing and this probably won’t be the case anytime soon. By default, swings in risk ap-petite/risk aversion were the most obvious alternative driver 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 has become the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs together with the Fed’s intention to run an expansion-ary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We don’t see many reasons to turn dollar positive before it be-comes clear that the Fed will take the lead in tightening monetary policy. We don’t expect this to happen anytime soon, but we keep any eye at this week’s Fed meet-ing. Short-term, there might be room for some consolidation on the equity rally, which might also (temporary) cap the upside in EUR/USD. However, as no forceful correc-tion on the liquidity-driven equity rally is likely, the eventual correction in EUR/USD might be limited, too.
Looking at the (technical) charts, EUR/USD cleared the range top at 1.4448, im-proving the picture for EUR/USD. The pair extensively tested the key1.4719 Decem-ber high, but no clear break occurred, yet. If broken in a sustainable way, the figure would paint a huge double bottom formation on the charts with targets more than 20 big figures higher. In a day-to-day perspective, we don’t have the impression that we are at the eve of a EUR/USD landslide and even some short-term correction on the recent rally is possible. Nevertheless, the LT picture stays EUR/USD constructive. The 1.4450 area is the first support to watch out for.
On Friday, the USD/JPY showed a very lackluster trading pattern in the lower half of the 91.00 big figure. There were no eco data and the flows in USD/JPY dried up ahead of the Holiday period in Japan this week. The pair closed the session at 91.29, compared to 91.08 on Thursday.
Today, Japanese markets are closed. So, yen trading will develop in thin market conditions. Most Asian equity markets are slightly lower this morning. However, with the dollar challenging the yen as the preferred carry currency it is difficult to say whether any stock market losses should still be seen as supporting the yen against the US currency. At least this morning, the opposite looks true.
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 be-tween USD/JPY and global investor risk aversion/risk appetite even became some-what 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) con-tinued to support the yen. Apparently, the dollar (and not the yen) has become the preferred funding currency for carry trades. Last week, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area 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 93.30 is a first high profile resistance short-term. In a longer term perspective, the 87.10 area remains the next high profile target for this pair.
On Friday, sterling remained under heavy pressure. The themes guiding the price action were not really different for the previous sessions. Uncertainty on the whether the BOE will still take additional steps in its QE (e.g. by reducing the interest rate on excess bank reserves with the BOE) and some negative press headlines on the UK financial sector were enough to trigger a new wave of sterling selling. Better (less negative than expected) UK monthly budget data were not able to turn the sterling negative tide. The move even accelerated during the US trading hours. EUR/GBP closed the session at 0.9040 compared to 0.8961 on Thursday.
Overnight, the Rightmove house prices came out better than expected at 0.6% M/M (-1.5% Y/Y) but the report was no support for sterling. This morning, a lot of atten-tion in the currency market goes out to an article in the BOE Quarterly Bulletin. In this article, the BOE indicates that changes to UK’s relative economic outlook, the perceived riskiness of UK assets and the need for the economy to rebalance away from domestic consumption all played a role on the fall of sterling over the previous tow year. The bank concluded that the long-run sustainable real sterling exchange rate may have fallen. These kinds of headlines are of course no support for the bat-tered UK currency. EUR/GBP is setting new reaction highs at the moment of writing.
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 mone-tary 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 pe-riod of time. This triggered a new sterling selling wave. The break above the 0.8700 range top confirmed the deterioration in market sentiment towards the UK currency. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative, as evidenced by BoE King’s remarks in his testimony before Parliament last week. Recently, we had a buy-on-dips ap-proach for EUR/GBP. After the recent rebound, the pair is now heavily overbought. The targets of the double bottom formation with neckline at 0.8699 have been met (0.8940/0.8998) and the pair is now coming close to the 0.9082 (April high). There is still no good reason to row against this sterling negative tide. Nevertheless, we wouldn’t jump in at the current levels anymore. ST players can consider partial profit taking on EUR/GBP longs and look to re-buy in case of a correction. We have the impression that the market has come to the conclusion that the only way for sterling is to go down. This kind of extreme market positioning always contains the risk of a correction.
