On Tuesday, FX traders were just counting down to the appearance of Fed Chairman Bernanke before the US Senate. Other economic data or events where only of second tier importance and didn’t affect trading, which was technical in nature. EUR/USD dropped sharply as the text of the testimony showed no hints about a near-term easing of policy. The disappointment, which was illustrated by a fall in equities, was rapidly washed away, allowing EUR/USD to close the day with even small, albeit insignificant gains.
During the morning session in Europe, equity markets were positively oriented, even if moves showed little momentum. EUR/USD had reached a new high at 1.2313 in Asia and this level was revisited at around the publication of the ZEW indicator. Investor sentiment (outlook) still worsened in July, but was near expectations. The current situation index was still positive, but declined more than expected. Together with investor uncertainty going into the Speech of Mr. Bernanke the ZEW report provided a good enough excuse for EUR/USD to return lower in the intra-day trading range. Just like the day before, there was again no perfect intraday match between sentiment on risk/equities on the one hand and EUR/USD on the other hand. EUR/USD was in the 1.2275/80 area when the headlines of the speech of Mr. Bernanke hit the screens. The written text of the testimony brought no new information. The Fed is still prepared to take further action, but the Fed Chairman stopped short of any specific indications on whether and when this might happen. Markets of riskier assets as equities were disappointed and the dollar jumped higher. EUR/USD tumbled below the 1.22 barrier during Bernanke’s testimony, setting an intra-day low at 1.2189, about 100 ticks below levels traded ahead of Bernanke’s speech. However, the disappointment was short-lived and riskier assets like equities started to fight back in a move that would last until for the bigger part of the session. It left equities with good gains (0.75% for the S&P) and near the intra-high highs in the close. Consequently, EUR/USD showed a similar upward trajectory in the remainder of the session, leading to a daily close at 1.2294, up from 1.2271 on Monday eve. During the Q&A session, Bernanke remained inconclusive regarding the question whether the FOMC will ease policy on August 1. He however became a bit more specific on the measures that eventually could be taken. Besides QE, he mentioned communication, lowering the interest rate on excess reserves, using the discount window for lending purposes. However while reversing initial losses, yesterday’s price action doesn’t suggest that the recent rebound/correction of EUR/USD is on a strong footing, even if the downside seems to be protected too for now.
Overnight, EUR/USD initially traded sideways, but in lockstep with a weakening of Asian equities the pair is losing some altitude and trades currently around 1.2270. We have no good take on why Asian equities are weakening. There are some political problems in the Japanese government and some negative headlines from the euro side. Schaeuble repeats that the Spanish state and not banks are liable for rescue (for now??), an ECB spokesman confirms that issue about burden sharing with senior bondholder is evolving.
Today, the eco calendar is fairly uneventful. US housing data are becoming gradually a bright spot for the economy, as Mr. Bernanke also stated in his testimony, but they are quite volatile in a month on month perspective. Sharp deviations of consensus are probably needed to get a market reaction, but even then it shouldn’t have a lasting impact. Mr. Bernanke will now appear before the House for the second leg of his testimony, which shouldn’t bring new info.
Finally the Beige Book, a preparatory document for the August 1 FOMC meeting will be published. We expect it to show a picture of a slowing economy in line with recent data releases. On the euro side, no eco data and few events. So, the sentiment on risk may give the pair its orientation intra-day.
Technicals and view. EUR/USD touched a new 2012 low at 1.2288 on June 1 as uncertainty on the EMU debt crisis weighed. From there, a technical rebound started and this correction was extended further out in June. However, the next high profile level on the charts 1.2824 (21 May top) stayed out of reach.
EUR/USD reached a lower top at 1.2693 after the EU summit, but a test of the range top again didn’t occur. A new down-leg finally pushed the pair beyond the 1.2288 rang bottom. Sustained trading below this high profile level would open the way for a return of the 1.1877 level (2010 low + low of EUR/USD since the start of the debt crisis). In a longer term perspective, we remain EUR/USD negative and think that this level might be reached over time. Short-term, it might take some time for EUR/USD to digest the recent losses and to unwind oversold market conditions. Sustained trading above the 1.2500 area would be an indication that the downward pressure is easing short-term. We don’t expect that to happen anytime soon. We look out how far this correction has to go before reconsidering to (re)install EUR/USD short positions.
On Tuesday, EUR/GBP followed largely the intra-day movements of EUR/USD, but at the margin sterling again did slightly better, as it set a new ST low.
However, in a daily perspective, the price move was insignificant. EUR/GBP closed at 0.78529, marginally up from 0.7849 previously. The lower-thanexpected UK CPI was unable to leave its traces on the charts.
EUR/USD and EUR/GBP traded with a slight positive bias in early European trading. The lower-than-expected UK CPI had little impact, but when EUR/USD grinded lower, also EUR/GBP came off intra-day highs. As equity markets reacted disappointingly following the release of the headlines of Bernanke’s speech, both EUR/USD and cable fell lower, but the euro was hit harder than sterling, which resulted in a new ST low in EUR/GBP at 0.7831. However, the disappointment was rapidly digested and riskier assets fought back. EUR/USD erased its losses and so did cable, but understandably, now it was the euro that outperformed sterling, pushing EUR/GBP back to opening levels. The session was insignificant in a broader perspective.
Today, the UK calendar contains the labour market data. We have no reasons to distance us from consensus that expects again slightly negative figures (+5K for the claims). The BoE Minutes are interesting as they will show the number of governors supporting the QE expansion by £50B and might give us more insight in their thinking.
From a technical point of view, the EUR/GBP cross rate was captured in a consolidation pattern 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 without sustainable results. Finally, EUR/GBP dropped below the 0.7950 range bottom. This break opens the way to the next high profile support, in the 0.77 area (Oct 2010 lows). The pair is oversold, suggesting that the decline might shift into a lower gear short-term.
The case for a rebound in EUR/GBP is technically slightly weaker, as yesterday there was still a near term low and in the EUR/USD the pair tested in vain this level for three consecutive sessions. Nevertheless, we stick to our view that the decline needs to be digested and oversold conditions worked off.