On Monday, EUR/USD trading took a very slow start of the new trading week. US markets were closed for the Labour day Holiday and no important eco data were on the agenda in Europe. So, there was no big story to inspire trading. EUR/USD reached a new correction high early in European trading close to 1.2920, but a test of the 1.2923 resistance level (August 18 reaction high) was rejected. European equities had a soft spot during the morning session. EUR/USD dipped lower in step and the pair was not able to regain this loss even as European equities returned to the open levels/gains later in the session. In any case, yesterday’s price action was mostly order-driven in a thin market. EUR/USD closed the session at 1.2876, compared to 1.2896 on Friday evening.
Overnight, the EUR/USD cross rate was captured by a stop-loss selling wave. The move was said to be linked to an article in the WSJ stating that the EU stress tests have understated the bank’s holdings of potentially risky government debt. There was also some market chatter on the Association of German banks warning that the country’s 10 biggest banks may need €105 bln of additional capital. However, these headlines were already on the screens yesterday and at that time had no impact on EUR/USD trading. At least for now, we see little reaction on the currency market on Obama’s infrastructure plan.
Today, the calendar of eco data and events is again not very inspiring. The July German factory orders are interesting, but we doubt that they will have a lasting impact on EUR/USD trading. After the overnight price action, the question is whether European sovereign risk and its impact on the European banking sector will again become a key factor for global markets and for EUR/USD trading. We find it a bid strange for the issue of the stress tests (WSJ article) to have such an impact on EUR/USD trading at the current juncture. The move occurred in rather thin trading conditions early in Asian trade this morning. So, we have to see how this story will develop in European and US trading. Nevertheless, we stay open minded. The overnight price action, if confirmed later today, could be a technical signal the recent rebound in EUR/USD is running out of steam. So, we take a close look at the technical charts. Some correction/profit taking on the equity market could also break the ST upside momentum in the EUR/USD cross rate.
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 momentum was EUR/USD negative due to global uncertainty/ risk aversion. This correction fizzled out recently and the recent 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. Yesterday, the pair came close to the 1.2923 resistance area (mid August high). However, the test was rejected and this was enough a reason for some profit taking, albeit in thin market conditions. For now, the technical picture is still constructive, but the upside is apparently becoming less easy. A drop below the 1.2780 neckline would be a first warning signal that the dayto- day momentum is waning. So, at least partial stop-loss protection on EUR/USD longs might be warranted. Short term players might consider to take profit into strength.
With the US markets closed for the Labour Day Holiday, there was also no big story to tell on USD/JPY trading. However, the price action after the US payrolls report clearly remained a major disappointment for USD/JPY bulls. So; the pair remained under downward pressure despite constructive stock market sentiment on the Asian and European equity markets. On the other hand, there was no strong enough trigger to push the pair below the 84.00 handle. Today’s BOJ policy decision was another good reason for USD/JPY traders to stay cautious. The pair was blocked in a tight range between 84.50 and 84.05 and closed the session at 84.21 almost unchanged from the 84.31 close on Friday evening.
This morning, BOJ didn’t change course, but this was no surprise for markets. The Bank said it will take timely action when necessary. This ‘news’ was of course far from enough to deter yen bulls, especially as Asian stock markets shifted into a lower gear this morning. Fed’s Kohn keeping the door open for further QE in the US is also no support for the dollar, especially not for USD/JPY.
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 manufacturing ISM and payrolls release, something has indeed changed. During August, investors had prepared themselves ever more for a protracted slowdown in 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. If the rebound on the equity markets would slow, the window of opportunity for USD/JPY to profit from recent good news would be closed again. In such a scenario, markets will continue to debate on the possibility of yen interventions.
On Monday, sterling was an underperformer among the major currencies. There was no specific news headline to explain the move. Recent eco data were not sterling supportive. Yesterday, the August new car registrations showed a further decline in the Y/Y figure, but it would be an exaggeration to blame this release for yesterday’s poor performance of sterling (against the euro). The move was probably due to or a few selling orders in a rather thin market. In this respect, there was some market chatter on hedging related to a Gilt repayment. Technical considerations played a role, too with the pair clearing the 0.8363 level (10 August high). Later in the session, some profit taking on euro longs kicked in. EUR/GBP closed the session at 0.8365, compared to 0.8345 on Friday evening.
Overnight, the UK BRC retail sales monitor showed a rise in sales values of 1.0% on a like-for-like basis and 2.8% for total sales. This was a slightly positive figure even as uncertainty on job cuts and tax increases were said to prevent people from making major spending commitments. Later today, the there are no important data on the UK eco calendar. EUR/GBP joined the global correction in the euro overnight.
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 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. The pair trading north of the 0.8280 area improved the short-term picture in this pair. Yesterday, the pair tried to regain the 0.8363 resistance (10 August high), but as was the case for EUR/USD, the test of this upside resistance was rejected. For now the picture hasn’t changed in a profound way, but we have the impression that the topside in the euro is becoming more difficult short-term. So, some profit taking on EUR/GBP longs might be considered.
