On Thursday, currency traders were counting down the policy decisions of the ECB and the Bank of England. Sentiment on risk wasn’t that bad. European equities cautiously extended the post-summit rebound. However, the euro failed again to profit. EUR/USD even drifted lower toward the 1.25 barrier. Investors were cautious to be too much euro long going into the ECB decision. A Spanish bond sale was no ‘grand cru’, but the country placed the amount they had hoped for. Early in the afternoon the central banks stepped into the spotlights. The Bank of England delivered as expected. However, at the same of time of the BoE announcement, the PBOC China reduced its key rates too. There was a very cautious positive reaction on the equity markets, but the decision didn’t provoke the boost for risk assets one would expect.
The breaking point for EUR/USD trading was the ECB decision. Draghi & co cut the repo rate by 25 basis points to a record low of 0.75%. This was the mainstream market expectation. The ECB also cut the deposit rate to zero. It is often very difficult to understand the drivers of a market reaction. This was also the case yesterday. Nevertheless, the sell-off of the euro started when the ECB decision hit the screens. EUR/USD dropped from the 1.2515 area to an intra-day low of 1.2364. The major part of this move was already completed at the start of the ECB press conference. So, as the cut in the refi rate was more or less expected, the sell-off the euro was due to the unexpected cut in the deposit rate. The (albeit small) decline in short-term market rates might have been a negative for the euro. (Currency) markets might also have been surprised that the ECB is taking such an ‘unconventional’ step. In the past, the ECB was very reluctant to walk away from the path of orthodoxy and was no front-runner in taking ‘unconventional’ measures . Yesterday’s ‘step in the dark’ might give the impression that the bank is desperately looking for means to address the problems in the economy and in the market. Whatever the interpretation, the euro paid a big price. During the press conference, the ECB president provide no reason for markets to change their negative assessment. Mr. Draghi said that downside risks are materializing. In addition, he didn’t give a clear explanation on the purpose of the deposit rate cut. All this didn’t give much confidence and EUR/USD held with striking distance of the intraday low. The US eco data were (ADP, claims, non-manufacturing ISM) were not that bad, but they were largely ignored by the (currency) markets. EUR/USD closed the session at 1.2392, compared to 1.2527 on Wednesday.
Overnight, Asian equities markets are mostly lower, but the losses are small. This also means that yesterday’s rate cut by the PBOC wasn’t able to support sentiment on risk. EUR/USD is holding in the 1.2380 area.
Today, there are only few eco data on the calendar in Europe. The Germany industrial production data are interesting but no market mover. The focus will be on the US payrolls report. The key question is whether this month’s report can change the trend of sluggish job growth seen over the previous three months. We put the risk for the payrolls slightly to the upside of consensus (100.000). However, from a currency point of view, it is not that easy to anticipate the market reaction. Yesterday, EUR/USD was in the first place hit by market uncertainty on the unexpected/unconventional step of the ECB to cut the deposit rate. At the same time, the euro remains also a barometer for global sentiment on risk. In case of a poor payrolls report, we expect a further decline of EUR/USD. We don’t see the euro gaining growth on bad news. In case of a better than expected figure, a positive reaction of the equity markets might give the euro some downside protection. However, we expect a rebound of EUR/USD to be rather limited. Of late, the euro didn’t profit much from risk-on sentiment. Yesterday’s ECB communication clearly indicates that there is a good reason for sustained euro weakness. Last but not least, the EMU institutional issues (implementation of the summit; renewed bond buying or not, additional aid for Greece, ....) are still around the corner. So, any positive reaction of EUR/USD due to an improvement in sentiment on risk should be limited and short-lived. So, we look to sell into strength.
Technicals. EUR/USD touched a new 2012 low at 1.2288 on June 1 as uncertainty on the EMU debt crisis weighed. Last month’s poor US payrolls report finally provided the trigger for a technical rebound that was extended further out in June. However, the next high profile level on the charts 1.2824 (21 May top) stayed out of reach and the rebound faltered The 1.2443/36 support was extensively tested going into the EU summit, but a sustained break didn’t occur. EUR/USD reached a lower top at 1.2693 after the EU summit, but a test of the range top again didn’t occur. After the EU summit we changed our ST assessment on the EUR/USD cross rate from negative to neutral, but we maintained our view that the 1.2824 resistance would be difficult to break.
Thursday’s break of 1.2553 and yesterday’s break of the 1.2408 support deteriorated the short-term technical picture. The 1.2288 range bottom comes now again on the radar. We look to sell into strength for return action to this target level. Sustained trading above the 1.25 breakdown area would be a first indication that the pressure is easing.
On Thursday, EUR/GBP traded quite volatile in the run-up the policy decisions of the BOE and the ECB. The pair hovered in a 0.8020/0.8040 rang going into announcement of the BOE. The Bank brought no surprise and raised the programme of asset purchases by £50 bln to £ 375. Sterling moved to the bottom of the mentioned trading range. This might be partly due to some outside expectations for more aggressive action of the BOE. However, it was not the BoE who took markets by surprise. Less than one hour after the BoE decision, the ECB policy decision flashed on the screens. The rate cut of the ECB refi rate was not surprise. However, the zero deposit rate was clearly not discounted in the market. With this decision, the ECB moved clearly in uncharted territory. This high profile decision hit the euro. EUR/USD tumbled and EUR/GBP to some extent joined this move; The pair dropped below the 0.8000 mark and EUR/GBP tested the 0.7972 support, the last area of defence head of the year low at 0.7950. However, this level was left intact, at least for now.
Today, the UK PPI data will be published. They are interesting, but with yesterday’s BOE step out of the way, we doubt that this report will have much impact on markets. To focus will continue to be on the fall-out from yesterday’s ECB decision. Sentiment on the single currency as clearly deteriorated. EUR/GBP is coming very close to the year low. A test of this level might be on the cards and we wouldn’t be surprised to see a break of this level.
From a technical point of view, the EUR/GBP cross rate consolidates following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in.
Continued trading above the 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, but there were no follow-through gains. Of late, we looked to sell into strength for return action lower in the range. In case the 0.7950 year low would be broken, the next high profile support is seen in the 0.77 area (Oct 2010 lows).