Sentiment remains EUR/USD supportive, but markets are in a wait-and-see mode ahead of the payrolls
On Thursday, European (equity) markets started the trading session on a cautions footing, digesting the strong gains from Wednesday. A similar reaction was visible on the FX markets as EUR/USD fell temporary back below the 1.28 mark. However, the underlying sentiment toward the single currency remained constructive and any dips were still considered a buying opportunity especially as European equity markets gradually managed to overcome the (small) early losses. The European Q2 GDP fig-ure was in line with expectations. The details were constructive as, next to the con-tribution from net exports, also consumption growth was reported at a decent level. However, these considerations as usual had hardly any impact on EUR/USD trading. The pair settled just below Wednesday’s highs going into the ECB press conference. At the ECB press conference, the ECB president as expected upgraded the Bank’s forecasts for European growth this year and next. In addition, the Bank also made a small amendment to technical specifications for its 3-month refi operation. However, the currency market did not pick this up as the ECB moving a small step closer to the exit of its extraordinary measures. There was some market nervousness at the start of the ECB press conference, but after all the impact on currency trading was very limited. Nevertheless, we retain that the ECB is still tentatively giving more weight to the modeling of its exit strategy while the Fed recently still gave the impression that the internal debate was still more about whether or not extending its supportive monetary policy. Later in the session, better than expected US pending home sales underpinned US equities throughout the session. However, this time the euro failed to profit from it. The EUR/USD pair closed the session 1.2825, only slightly higher from 1.2809 on Wednesday evening.
Today, PMI/ISM confidence indicators from the services sector will be published. It is an interesting piece of information and sometimes it even leaves some traces on the (currency) graphs. However, especially the impact of the European indicators on currency trading will be limited as all traders and investors will be looking forward to the key US payrolls report. Until Wednesday, markets were positioned for a weak figure. However the strong US Manufacturing ISM caused some doubts with the bears. We don’t have hard arguments to take a different view from the consensus. However, after the strong ISM, a poor payrolls release might now trigger quite a sharp reversal of the optimism as mirrored by the gains on the equity markets and, to a lesser extent also in EUR/USD. Of course for the letter, the case is once again less straightforward, but for now, we still assume that pair will continue to mirror the swings in equities, especially in case of a sharp (negative) move.
MT picture and technicals. From early June to early August, EUR/USD suc-ceeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro due the European government debt crisis. In addition, dur-ing June and July, European eco data came out reasonably good. At the same time, US data suggested a cooling down in the pace of the recovery in the US. Interest rate differentials between the US and Europe (Germany) turned sharply to the disad-vantage of the US currency. EUR/USD reached a recovery high at 1.3334 early Au-gust, going into the Fed August meeting. At this meeting, Bernanke and Co admitted the slowdown in US growth and kept the door open for additional monetary stimulus (QE). Intrinsically, one would expect this to be a USD negative message from the Fed. However, the (currency) market played another card after the Fed meeting. Global risk aversion came again to the forefront and uncertainty on the global recov-ery was still seen a USD supportive factor, even as the negative surprises came from the US rather than from Europe. So, the EUR/USD currency pair was captured in a downward correction. This move is in the first place driven by global market senti-ment rather than by the specific economic news flow from the US or Europe. Last week, the EUR/USD decline slowed/bottomed.
In medium term perspective, we changed our bias on the USD from positive to neutral as the case for sustained dollar gains supported by a relative outperfor-mance of the US economy has been postponed ‘until further notice’. The dollar is even at risk to suffer the consequences of additional loosening of monetary policy by the Fed. Throughout the month of August, the market momentum was EUR/USD negative due to global uncertainty/risk aversion. Nevertheless, last week’s price ac-tion suggested that the downside in EUR/USD was becoming less easy. This might have partially been due to growing doubts on the US economy and thus on the dollar overall. In addition, last Friday’s price action showed that also a technical rebound on the equity markets was still possible as global investors at some point might come to the conclusion that enough bad news was discounted in current prices. Even reac-tion of EUR/USD on US eco data (good and bad) is not always consistent, we still assume that global sentiment will remain the most dominant factor for EUR/USD trading.
From a technical point of view, EUR/USD regained the 1.2732 resistance area (neckline H&S) and put in place a ST double bottom formation with neckline at 1.2780. Last week, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Recent price action in EUR/USD was constructive. We hold a ST positive bias/buy-on dips approach. The targets of the short-term double bottom formation with neckline at 1.2780 area at 1.2935/72. However, tight stop loss protection is warranted to protect a ST trend reversal in case of a big surprise of the payrolls and subsequent reaction on the equity markets.
Still no news from USD/JPY trading. The pair is apparently already in some kind of hibernation. In more or less erratic trading, the pair slipped close to the 84.00 mark during the morning session in Europe. European stocks gradually moving off from the lows and the positive reaction of the US equity markets to the pending homes sales also helped USD/JPY a few ticks higher. neveertheless, the price dy-namics in this cross rate were again very boring. The pair closed the session at 84.28, compared to 84.44 on Wednesday.
This morning, Asian/Japanese equities are again slightly higher. However, this is again not enough to inspire USD/JPY traders. Later today, the payrolls are a factor that has the potential to even move this cross rate, in case the release would be able to set a clear trend for the equity markets. Recently, the reaction to the rebound on the equity markets was limited. We don’t have a strong view on the outcome of the payrolls (maybe the risk is still for a slightly weaker figure), but if the report would in-spire further, sustained equity gains, this might gradually filter through into the USD/JPY cross rate.
Recently, we indicated that we didn’t expect a sustained weakening of the yen as long as the global picture doesn’t change. Recent price action looks like con-firming this hypothesis. Even more, recent upticks on the equity markets had only a limited impact on yen trading. Apparently, more convincing signals on the global economy are needed. With respect to the Japanese side of the story, markets are obviously not impressed by recent BOJ action. So, the feeling was reinforced that the BOJ has not that much of ammunition to really turn around the course of events on the currency markets. The pace of a further rise of the yen will remain the key factor for Japanese authorities to decide whether they will step into the market. As long as the decline in USD/JPY develops in a gradually way, we don’t expect immediate BOJ action. Only a swift move toward/beyond the 80 area, if it were to occur, would change the picture. So, for now we expect the current stalemate in USD/JPY to persist. We wouldn’t be surprised to see USD/JPY being blocked at current levels for some time to come.
On Thursday, the pattern in EUR/GBP trading was not much different from Wednesday. The euro remained relatively well bid overall while sterling felt some headwinds from weaker than expected UK data. Early in the session the NationWide House prices showed monthly decline of 0.9%. Later, the UK PMI for the construc-tion sector disappointed, too. As such, this is not an important economic indicator. Nevertheless, in the current environment, it didn’t help sterling either. So, EUR/GBP extended its uptrend from the previous sessions. The pair closed the session at 0.8327 compared to 0.8288 on Wednesday.
Today, the sterling traders will keep an eye on the UK PMI for the services sector. This week’s construction and manufacturing PMI’s disappointed. So, we put the risk for a weak figure of the services sector, too. If this would com true, this might EUR/GBP to some further gains. Looking at the global picture, we have the impres-sion that a return of risk aversion in case of weak payrolls report would also be slightly negative for sterling.
Since mid July, sterling had a good run against the euro. At the early August pol-icy meeting, the BoE maintained a balanced approach. Despite current high inflation, the BoE still sees inflation returning slightly below target once this temporary factors are worked out. Dissenter Sentance got no support for his call for a rate increase. However, this rather soft message didn’t prevent a gradual rise of sterling against the euro during the month of August. In the second half of the month, the move was supported by some encouraging UK eco data. However, the pair was gradually near-ing the key 0.8066 support area (year low). We hold on to our view that high profile news is needed (from Europe or from the UK) for the pair to clear the 0.8066/00 area. At this stage, we don’t see this trigger.
Recently, we had the impression that EUR/GBP had entered a consolidation pat-tern after recent sterling gains/euro slide and that the downside in the pair had be-come better protected. So, we installed a cautious buy-on-dips approach. This week, EUR/GBP succeeded a nice move higher. We hold on to our ST positive bias . The pair trading north of the 0.8280 area improved the short-term picture in this pair. Sustained trading beyond 0.8363 (10August high) would further improve the picture.
