On Friday, it was a relatively calm session for EUR/USD traders. There was still a lot of the debate and analysis on the new EU rescue package for Greece and additional measures to lower the risk for further contagion to other EMU countries. Looking at the market reaction, the EU agreement was considered a step in the right direction, even as further steps were seen highly probably in the future. Nevertheless, an outright chaos was again avoided and this continued to support risk taking. European equities recorded further gains, albeit at slower pace compared to the previous sessions. After the sharp spike higher on Thursday, EUR/USD settled in a rather narrow range close to the 1.44 mark. The focus was still on the EMU debt agreement, but investors kept also an eye on the German Ifo indicator as growth will probably become an important factor to decide whether or not the European debt crisis will turn out to be manageable. The Ifo came out weaker than expected, but is still at decent levels. So, the negative impact on EUR/USD was limited. There were no eco data on the agenda in the US. The focus over there was on the negotiations on the debt ceiling and the corporate results. On the first issue there were no dollar supportive developments. With respect to the earnings, several US bellwethers came out with good results. At first, this was moderately positive for sentiment on risk. Later, some end of week profit taking kicked in, both on the European equity markets and in the single currency. EUR/USD closed the session at 1.4360, compared to 1.4425 on Thursday evening.

During the weekend, the focus of the investment community turned to the deadlock in the US budget talks. At least for now, it looks that both parties are not prepared to substantial concessions. So, the political bickering apparently might probably continue going into the August 2 deadline. This is obviously a negative for risk. However, it is far less clear what it will mean for EUR/USD trading. Today, there are only some second tier eco data on the agenda. In euro zone there are confidence indicators from some individual member countries. In the US, the Chicago Fed national activity index and the Dallas Fed manufacturing activity index are no big market movers. So markets will continue to look for the news headlines on the US debt talks and further any late reactions on the EMU debt plan. With respect to the latter further clarification on the position of the rating agencies will be interesting even as the immediate impact on the market might be subdued. This morning, Moody’s cut the Greek debt rating from Caa1 to Ca. This caused some limited losses for the euro. With respect to the US debt situation, the question is whether the negative headlines from the US will be of much help for EUR/USD. Rising tensions in the US debt debate might also weigh on the bonds from weaker credits in Europe. If so, it is far from sure that the US tensions will be a big support for EUR/USD. It would be very bizarre to see the dollar profit from global uncertainty due to the US debt crisis. However, as long as markets continue to belief that some kind of last minute solution is still possible, the prospect for sustained gains of EUR/USD isn’t probably that big.

We had a LT bullish strategy for the EUR/USD based on the different policy approach between the ECB and the Fed. After a sharp correction in the first half of May, the EUR/USD cross rate bottomed out. The Greek debt crisis prevented a forceful rebound, but at first the EUR/USD cross rate easily held above the 1.4074/1.3970 range bottom. However, we turned cautious on the single currency as soon as Italy came in the spotlight of the EMU crisis two weeks ago. EUR/USD reached a minor new low at 1.3837 on the Italian debt woes. Last week, markets grew more confident that the EU would be able to reach a workable compromise on the Greek debt crisis and that the EMU would also be able to reduce the risk of contagion. Thursday’s statement brought a moderately positive outcome assessment and helped EUR/USD to return higher in the previous trading range, even as there Was/is no euphoria. The pair is now well the 1.4282 previous high and above the downtrend line from the year high. This has called off the downward alert in this cross rate. We changed our short-term assessment from negative to neutral. The 1.448 reaction high is the first important resistance on the topside. For now, we don’t anticipate on a big leap higher, even as the US debt crisis comes ever more in the spotlights.

On Friday, USD/JPY developed a trading pattern much similar to what had happened the days before. The moves were not really big, but at the end of the day, the pair in no way succeeded to move away from the recent lows. So, the pressure on USD/JPY clearly remained to the downside even as Japanese policy markets continue to warn on the negative impact of the strength of the yen. Lingering uncertainty on the European and the US debt crisis continue to support the yen. USD/JPY closed the session at 78.54; compared to 78.30 on Thursday evening.

This morning, BOJ’s Shirakawa warned again that the recent rise of the yen contained risks to Japan’s economic outlook and Japanese Fin Min Noda also repeated that he is closely watching movements in the currency market. The trading dynamics of USD/JPY haven’t changed. The pair is trading slightly higher from this mornings lows, but these lows are still within striking distance. The stalemate on the US debt crisis will probably continue to weigh on this cross rate.

Of late, there was no clear market theme guiding trading in the USD/JPY cross rate as the pair held a tight sideways trading range between 79.57 and 82.23. However, global uncertainty on the EMU debt crisis finally left its traces on this cross rate, too. The pair dropped below the 79.57 range bottom. This made us close USD/JPY long positions. There is no reason to row against the tide, especially as the chance for successful BOJ/fin Min interventions is far from sure, as long as the dollar remains under pressure across the board. So, the risk is for USD/JPY to continue drifting lower.

On Friday, EUR/GBP held a rather tight range mostly in the lower half of the 0.88 big figure. The pair reached a minor new high in the 0.8850 area, but the move had no strong momentum anymore. On the contrary, the good news from the EMU decision on Greece was apparently discounted in prices. So, the pair fell prey to some end of week profit taking. There was no high profile news for the UK side of the story. EUR/GBP close the session at 0.8809, compared to 0.8832 on Thursday.

During the weekend, Business Secretary Cable in interviews advocated that the BoE should consider additional QE as growth remained weak. There are no important economic data in the UK today. Looking forward, the first estimate of the UK Q2 GDP (scheduled for publication tomorrow) might revive the debate on more QE.

We have a LT EUR/GBP bullish view. The ECB’s firmness to prevent inflation from filtering through into the economy contrasts with the BoE MPC’s attitude of postponing a rate hike despite ongoing sky-high inflation readings. Last month, the downside in this cross rate remained well protected, even as the Greek debt crisis came back in the spotlights. The BoE minutes of the June meeting suggested that the BoE is closer to additional QE rather than to a tightening of monetary policy. This prevented any sustained rebound of the UK currency. Even during the recent flaring up of the Greek /EMU debt crisis, the EUR/GBP cross rate didn’t break any really high profile support levels yet. The 0.8721 level (16 June low/neckline) was extensively tested last week, but no sustained break occurred. We didn’t change our LT view on EUR/GBP yet. However, during the recent crisis, we couldn’t but turn more cautious on all euro long exposure until a comprehensive plan was in place. After last week’s EMU debt plan, short-term event risk on the euro zone has declined. So, the downside in the EUR/GBP cross rate looks rather well protected for now.