On Wednesday, the EUR/USD cross rate moved up and down in the 1.22 big figure. In a broader perspective, the global picture didn’t change. The pair is off the lows, but a more protracted rebound hasn’t materialized yet. Once again the usual (intraday) links between different markets (currencies, bonds equities) were rather light. At the end of the day, the EUR/USD cross rate was little changed.
On Tuesday evening, EUR/USD had reversed most of the initial losses that occurred after the testimony of Mr. Bernanke before the Senate. Markets were initially disappointed after the Fed president didn’t give any concrete hints on further policy stimulation in the near future. However, the decline in risky assets and EUR/USD was short-lived and EUR/USD tested the 1.23 area early in Asia yesterday morning. So, the pair was again close to the correction high (1.2317). However, there was not that much investor appetite to push the pair beyond that barrier. At the start of the session, there were some negative headlines on Spain (cf. our fixed income part). At the same time, German policymakers gave several quotes indicating that it was no done thing that the risk for the recapitalisation of the (Spanish) banking sector would be shared at a European level. This headlines and technical considerations (inability to take out the recent top) triggered a new intraday setback. The pair filled bids in the 1.2220 area just before the open of US markets. From there, sentiment on risk improved gradually. Of late, the (intraday) correspondence between EUR/USD and equities was less tight than in the past. However, this time EUR/USD joined the equity rally (supported by good US corporate earnings). The pair changed hands in the 1.2260 area at the close of European markets. EUR/USD remained well bid further out in the US and closed the day at 1.2284, compared with 1.2294 on Tuesday evening. So, EUR/USD made a nice intraday rebound, but in a broader perspective, the performance of the single currency was still a bit disappointing given the decent performance of European and US equities. Of course equities are not the only barometer for risk, especially not concerning the euro. In this respect, a further decline of core bond yields and a record high 10-year spread for Spain, are indications that there are still a deep-rooted tensions in the euro zone framework.
Today, the calendar of eco data in Europe is thin. The focus of investors will be on the auctions in Spain. The amount (total of €2-3 bln over three lines) should be absorbable. However, the high yield and the rather short maturities might be seen as an indication that market access is becoming ever more difficult.
However, we don’t expect too much direct negative impact on EUR/USD. The French bond auction should go smoothly. There will also be some attention for the debate in the German Bundestag on the aid for Spain. In the US, the initial jobless claims, the Philly Fed index, the existing homes sales and the leading indicators will be published. The claims and, to a lesser extent, the Philly Fed have potential to move intraday trading. For the claims, a rise from last week’s unexpected steep decline is expected (from 350K to 365K). Maybe a slightly lower/better figure is possible. As indicated earlier, the link between EUR/USD and equities is not as tight as it used to be. Nevertheless, the equity performance remains an important input for EUR/USD trading. So, the earnings season remains a wildcard for EUR/USD trading. The performance of the Asian stock markets this morning suggests that global sentiment on risk remains constructive. This might give EUR/USD downside protection. In a day-to-day perspective, EUR/USD should clear the reaction high 1.2317 soon. If so, it can be seen as an indication that the correction has some further to go. However, the momentum of the rebound over the previous days shows that it is a difficult battle for EUR/USD to make some further headway.
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 to 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 Wednesday, trading in the EUR/GBP cross rate was confined to a tight range near the recent lows. The EUR/GBP cross rate jumped higher upon the publication of the Minutes of the July BoE meeting. The message of the Minutes was mixed. Two members voted against further QE. However, a rise of £75 of asset purchases was also discussed and, probably even more important from a currency point of view, the issue of a rate cut is again on the radar. For now, there are no indications that the BoE will take this step anytime soon, but its assessment can change over time. The market clearly focussed on the soft factors in the report. EUR/GBP jumped temporary to the 0.7869 area. However, at that time the global performance of the euro was not really inspiring. So, EUR/GBP soon took the way south again and even set a minor now low at 0.7830. From there, the euro found a better bid overall. EUR/USD closed the session at 0.7847, little changed from the 0.7846 close on Tuesday.
Today, the UK calendar contains the retail sales. A second consecutive monthly rise is expected. Of late, trading in sterling was in the first place driven by global factors. The UK currency is currently also a beneficiary from the (cautious) improvement in global sentiment on risk. The UK eco data are often only of second tier importance. Nevertheless, a strong retail sales report might keep sterling to hold strong against the euro. The decline of EUR/GBP is slowing, but the at least for now, there are no indications that a forceful rebound is at hand.
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.