On Monday, there was again no obvious driver for EUR/USD trading. The G20 didn’t give a clear guide for trading on global markets. Nevertheless, European stocks started this key trading week on a positive tone. EUR/USD was off from the Asian highs at the start of European trade, but the pair held up rather well in the mid 1.23 area during the morning session. German inflation data came out soft but were largely ignored by markets. However, US traders were less prepared to the take risk. Apparently, US investors have become a bit more nervous on the prospects of the US recovery as the Fed turned more cautious on the pace of the US recovery last week. The US eco data (spending and income and the Chicago Fed national activity index) came out close to expectations. Nevertheless, sentiment deteriorated further after the data. A BIS report warning on the risk of a new crisis and urging for an exit of the expansive policy might have been a source of concern for markets. Uncertainty on the expiry of the 1-year ECB liquidity tender on Thursday and ongoing nervousness on the intra-EMU government bond market were euro negative factors, too. Whatever the reason, EUR/USD continued to drift south and the move even accelerated after the close of the European market. This pattern is in contrast with the price moves at the end of last week, when the euro spiked higher a few times after the close of the European markets. So, the repositioning/profit taking on EUR/USD shorts at the end of last week has apparently run its course, drying up a temporary source of euro buying. So, EUR/USD closed the session near the intraday lows at 1.2277, compared to 1.2369 on Friday evening. However, this just brought the currency pair more or less to the point where the intra-day short-squeeze of Friday evening started. So, the bottom line conclusion is that EUR/USD is still moving up and down in a sideways trading pattern, awaiting the key data and events that are scheduled for later this week. Nevertheless, yesterday’s price action can only be considered as slightly disappointing for those who had hoped that there was still room for a protracted rebound in this pair.
The slide of the euro was also visible in the EUR/CHF cross rate. The move continued to build on the recent change in the policy approach of the SNB. This change was again illustrated yesterday as a SNB member was quoted in an interview that the inflationary risks have largely disappeared and the Swiss exports have proven to be robust despite the strong Swiss Franc. EUR/CHF lost again more than one and a half big figure and reached an intraday low at around 1.3329 and the pair is being traded below this level again this morning.
Today, the sentiment indicators from the European Commission will be published. A slight decline is expected. However, on the European markets, the focus will be on the ECB refinancing operations (3 month LTRO and the weekly MRO), as the banks’ demand for liquidity might be an indication of the level of stress on the EMU money markets. Uncertainty on the need for liquidity in the European banking sector obviously is a source of concern and a negative factor for the euro. Of course, this issue might be out of the way later today or over the next two days. Later in the session, in the US, the CS house prices and the consumer confidence release of the Conference Board will be released. Recently US housing data came out weak as fiscal support for this sector had finished in April. The consumer confidence release is expected to show a moderate decline from 63.3 to 62.9. Last week global market (and currency) traders turned a bit more uncertain on the US recovery. At some point, it looked that this could also become a (slightly) negative factor for the dollar, at least in some selected dollar cross rate. However, with a lot of issues pending on the European markets, we still doubt that combination of disappointing US eco data and a negative impact on global risk appetite will provide a lasting support for the euro. So, if global risk sentiment remains negative, we continue to put the risk for EUR/USD to the downside.
MT picture and technicals. Early May, EU policy makers came out with a big plan to restore stability in the EMU government bond markets. However, in a first reaction this decision didn’t help the euro. EUR/USD continued its downtrend and the pair finally dropped below the key 1.2331 level (2008 low), painting a massive double top formation on the charts. This was an outright negative signal from a technical point of view. The long-term fundamentals are also not in favour of the euro. Several ‘South’ European countries desperately need a weaker currency to restore competitiveness. There are also a lot of the credibility issues on European fiscal and monetary policy that are not yet solved. Last but not least, European policy makers several times indicated that they were happy with the current level of the euro as it will help to support growth. So, there is no reason for the euro to be overvalued, which is still the case. On the other side of the EUR/USD equation, the US recovery looked like being rather well on track. Recent data and last week’s Fed statement turned a bit more cautious on the pace of the recovery. Nevertheless, we hold on to our view that the relative growth prospects between the US and Europe are still in favour of the dollar versus the euro. We hold on to our long-term EUR/USD negative bias. The 1.1640 (2005 low) is the next high profile target on the EUR/USD charts.
End May, we turned temporary a bit softer on the pace of the euro decline as we felt that there was room for some consolidation after the steep losses since mid- April. The Hungarian crisis caused EUR/USD to set a new corrective low, but this was apparently some kind of short-term exhaustion move. Some consolidation/ correction on the long-standing euro decline kicked in. EUR/USD regained the 1.2150 area (previous reaction low area). This was an indication that pressure is easing short-term. Last week, we kept a wait-and-see approach and hoped that the correction would go to the 1.2455/1.2673 area (previous highs), where we would reconsider to reinstall EUR/USD short positions. EUR/USD traded temporary north of the 1.2455 area; but the gains could not be sustained. Recently, the dollar wasn’t in great shape either. The question is whether the euro should be a big beneficiary of this loss of momentum of the US currency. We still doubt whether this will be the case. So, EUR/USD is currently in a consolidation pattern. In a day to day perspective, yesterday’s price action was not a good sign for the euro. A break below the 1.2254 support would signal a further loss of momentum. A slide below the 1.2150 area would again open the way for return action to the year lows. A sell-on-upticks approach is favoured. Return action the recent highs is become less evident after yesterday’s move.
On Monday, there was absolutely no story to tell on USD/JPY trading. The pair was locked in a tight sideways trading pattern between 89.20/40 for most of the day, there was a brief spike south of this range after the negative start on the US equity markets. However, the blip was very short-lived and the pair closed the session at 89.37, compared to 89.23 on Friday evening. So, in this respect, the price action in USD/JPY didn’t tell exactly the same story as in EUR/USD.
This morning, Japanese stocks recorded quite some heavy losses. As series of eco data (household spending, labour market data) came out weaker than expected. May industrial production (-0.1% M/M and 20.2%) was close to expectations. This morning’s flaring up of global aversion to risk finally hammered USD/JPY through the key 88.95 support area.
We have a LT positive bias for this cross rate as we still assume that the cyclical economic rebound in the US will support the dollar over time. Of course, recent US eco data and last week’s Fed statement don’t support our case and might have a negative impact on the USD/JPY cross rate short-term. However, at least for now we don’t change our long-term assessment on the US economic recovery yet. (This week’s US eco data might be an import piece of information for this assessment.) The ongoing need to fight deflation in Japan is a LT negative for the yen.
End May, we indicated that we had the impression that some bottoming out could be in store. So, we reinstalled a cautious buy-on-dips approach, mostly on technical considerations. Nevertheless, USD/JPY only made some tepid gains in the wake of the subsequent easing of global tensions. The pair reached a reaction high in the 92.89 area early June. Since then the pair drifted again cautiously lower and last week’s price action caused some additional cracks in the short-term picture as the pair dropped below the 89.81 support area. This morning’s break below the 88.95 support, deteriorated the short-term picture further and caused US to stand a side on or tactical USD/JPY long position. The ST picture has become USD/JPY negative. The 87.95 year low is now the next high profile level on the charts. A sustained break below this level would be a high profile red alert for a technical point of view. However, we can’t image that a sharp move below this level wouldn’t spark a reaction (at least verbally) from the Japanese authorities. However, at least for now, we don’t see any compelling reason to row against this USD/JPY downtrend for now.
On Monday, sentiment on sterling remained fairly positive. There was no eco news behind the price move. Trading was order-driven and technically inspired. So, sterling continued to enjoy the same factors that were at work last week. The combination of profound austerity measures while at the same time the BoE turned less soft on monetary policy, created a sterling positive environment. So, EUR/GBP started the week the 0.8230 area, but pressure continued to be on the downside. Around noon, the pair fell again below the psychological level of 0.8200 and came close to the 0.8180 year low. However, with no high profile news on the agenda, this was still a too high hurdle to overcome. However, sterling got again a shot in the arm from BoE’s Sentence (dissenter for a rate hike in June). The BoE member clearly said that the UK budget does not remove the need to start raising rates. The improvement in the global economy, the turnaround in Brittan itself and the resilience in inflation were all seen good reasons to tighten monetary policy. Sentence also mentioned sterling’s weakness as partly to blame for inflation and that the UK currency was the weakest currency over a 3-year period in the G20. These headlines were a good reason enough to hammer EUR/GBP below the recent lows. EUR/GBP closed the session at 0.8127, compared to 0.8215 on Friday evening.
Today, the UK calendar contains the final May money supply data and a series of credit data. We don’t expect this data to have a big impact on sterling trading. The UK currency is obviously enjoying a positive momentum. Sterling shorts (both in cable and in EUR/GBP) are gradually being squeezed out and there is no indication that is move will stop any time soon. So, for now there is no reason to blow against this sterling supportive trend.
Since mid March, sterling performed well against the euro. Global euro weakness was the name of the game. At the same time, sterling digested the uncertainty on the outcome of the UK elections and on the budget rather well. Finally, EUR/GBP dropped below the key 0.8400 support area (2009 low). Until now, we were not convinced that sterling should strengthen much further against the euro from current levels. The euro was/is under pressure as investors fear that the austerity measures to reduce the government deficits/debt will dampen growth, but we assumed that the situation in the UK was a bit similar. In addition, we thought that monetary policy in the UK would stay very accommodative (as will be the case in Europe) as the BoE would counterbalance a tighter fiscal policy with a loose monetary policy. After last week’s BoE minutes, this assessment of a tight fiscal policy and an ongoing extremely loose monetary policy is not that sure anymore. One can no longer exclude that inflation at some point will force the BoE to tightening monetary policy well ahead of the ECB. The jury is still out on this issue but after the June Minutes, the balance has tilted a more in favour of sterling.
Early June, we couldn’t ignore the high profile signal on the technical charts. The break below the key 0.8400 area was an indication that global negative sentiment toward the euro outweighed the potential doubts on sterling. So, we amended our short-term bias for EUR/GBP trading from neutral (range trading between 0.8400 and 0.8800) to negative. Even in such a scenario, we still expect any further losses in EUR/GBP to occur at a gradual pace. Mid June, the decline of EUR/GBP slowed. Nevertheless, the subsequent rebound was far from convincing, too. Last week, EUR/GBP started another down-leg and the pair dropped temporary below the 0.8200 mark. Yesterday’s break below the previous lows marks a high profile technical sign. 0.8056 (1st target double top of 0.8603) is the next target on the technical charts.
