On Friday morning, investors were awaiting the outcome of the key US payrolls report. Nevertheless, sentiment to risk remained constructive already at that time. This kept EUR/USD well bid, with the pair comfortably holding above the 1.28 handle. The US payrolls came out materially better than expected. This was an obvious positive sign for equity investors and for the buyers of other riskier assets. EUR/USD gained some ground, but traders still reacted with some reservation. This release had of course also a US-supportive aspect. A weaker than expected ISM of the nonmanufacturing sector in the US caused even a temporary blip in the rise of equities and of EUR/USD. Nevertheless, finally the risk story prevailed and EUR/USD joined the rebound on the equity markets. The pair closed the week near the highs at 1.2896, compared to 1.2825 on Thursday. The pair regained the 1.2872 38% Fibonacci retracement level, but a real test of the 1.2923 resistance (mid August high) didn’t occur.
Today, the calendar of eco data and events is almost empty. US markets are closed for the Labour Day holiday. In Europe, there are also hardly any eco data on the agenda. So, investors will continue to try to asses the consequences of last week’s US eco data. At least for now, risk appetite apparently remains the key driver for EUR/USD trading. This morning, Asian equity investors also joined the positive global reaction. So, even as there will probably be little in the way of hard news to guide EUR/USD trading today, sentiment will probably remain EUR/USD constructive. In this respect, we also notice that there is no outperformance of the European bond markets compared to the US. In other words, at least for now the string of positive US eco data of last week hardly provides the US currency with any additional interest rate support vis-à-vis the single currency.
MT picture and technicals. From early June to early August, EUR/USD succeeded 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, during 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 disadvantage of the US currency. EUR/USD reached a recovery high at 1.3334 early August, 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 recovery 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 sentiment rather than by the specific economic news flow from the US or Europe. Two weeks ago, 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 outperformance of the US economy has been postponed ‘until further notice’. Throughout the month of August, the market momentum was EUR/USD negative due to global uncertainty/ risk aversion. This correction fizzled out recently and last week’s turn in global sentiment finally changed fortunes for EUR//USD cross rate. Global sentiment remains the key factor, but we also keep in mind that the ECB is apparently still a bit more focused on continuing its exit strategy than is the case for the Fed. This could lend EUR/USD some support, too (even as the currency market showed hardly any reaction to last week’s ECB press conference).
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. Two weeks ago, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Last week’s price action improved the short-term picture in this pair. So, for now we don’t feel the need to change tactics at this stage. The first obvious resistance area is at 1.2923 (Mid august high). The targets of the short-term double bottom formation with neckline at 1.2780 area at 1.2935/72.
The USD/JPY received a cautious bid on Friday morning in Europe as investors stayed quite optimistic going into the US payrolls. The pair even came close to the first resistance area at 84.67 (Wednesday’s high). The payrolls had to decide whether there was a good enough reason to clear this first hurdle. At first sight, there was! The US payrolls came out materially better than expected. Risky assets jumped higher and this time the move was forceful enough to even break the deadlock in the USD/JPY cross rate. USD/JPY swiftly cleared the 85.00 mark immediately after the release. However, contrary to the price action in most other markets, the positive reaction to the US payrolls could not be sustained. The spike in USD/JPY was very short-lived and it was reversed after the weaker than expected US ISM for the manufacturing sector. Even the ongoing positive sentiment on the US equity markets later in the session was of no help for USD/JPY bulls. The pair closed the session at 84.31, almost unchanged from the 84.28 close on Thursday.
This morning, most Asian equity markets join the rebound in the US and Europe on Friday, but once again this has hardly any positive impact on USD/JPY. So, upticks in this pair apparently are still seen a selling opportunity (probably in the first place by Japanese exporters, amongst others).
Recently, we that indicated that a change in the global picture was a prerequisite to unlock the stalemate in USD/JPY trading and the see some sustained weakening of the yen. After the last week’s US ISM and payrolls release, something has indeed changed. During August, investors had prepared themselves ever more for a protracted slowdown in the US growth (and maybe even globally). The risk for such a scenario has materially declined after last week’s US data. In this context, one would expect that there might be room for a further unwinding of risk aversion traders that were set up last month. Until now this was obviously not the case. So, for now the stalemate in USD/JPY trading persists. Nevertheless, if global sentiment would remain constructive, the downside in USD/JPY could become a bit better protected, too. A break above the 85.23 (Friday’s high) would be a first indication that sentiment is improving. Of course were not that far yet. On the other hand, over the next 24 hours, yen traders will also keep a close eye on the BOJ policy meeting. However, after last week’s move, we don’t expect any big steps from the bank at this weeks meeting.
On Friday, the UK services PMI came out again out weaker than expected, in line with the development of the survey’s from the manufacturing and the construction sector earlier last week. Sterling had tried to regain part of the recent losses before the publication of this release. The EUR/GBP pair tested bids in the 0.8300 area just before the publication, but reversed the intraday losses immediately after the publication of the PMI. Later in the session, the pair to some extent followed the swings in EUR/USD. Thursday’s high (0.8348) was tested, but no clear break occurred yet. The pair closed the session at 0.8345, compared to 0.8327 on Thursday.
Today, the UK calendar is thin with only the car registrations on the agenda.
Since mid July, sterling had a good run against the euro. At the early August policy 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 nearing 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 advocated that EUR/GBP had entered a consolidation pattern after recent sterling gains/euro slide and that the downside in the pair could become better protected. So, we installed a cautious buy-on-dips approach. Last week, EUR/GBP succeeded a nice move higher. This move was both due to global euro strength but also mirrored investor disappointment on some poor UK eco data of late. For now, we hold on to our ST positive bias in EUR/GBP. 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.
