On Wednesday it looked as if the EUR/USD correction was slowing and maybe that some bottoming could be on the cards. However, this hypotheses was rejected on Thursday. Sentiment on risk deteriorated further in Asia as the HSBC manufacturing PMI from China remained well in contraction territory (even if it was marginally higher than the previous month). So EUR/USD challenged Tuesday’s low just below the 1.30 mark at the start of trading in Europe. The French advance PMI’s were awful and hammered EUR/USD deeper into the 1.29 big figure. Contrary to the French PMI, the German one was materially better than expected. The decline of EUR/USD halted temporary, but a new selling wave hit the euro later in the session. This move was seen as partly induced by stop-tripping in other euro cross rates (EUR/JPY and EUR/GBP). The Spanish bond auction went reasonably well, but this didn’t change sentiment on the EMU asset markets and on the euro. At the same time, spreads of Spain and Italy (after a remarkable decline on Wednesday) widened. This might have weighed too, even as the reason was again not that obvious. EUR/USD reached an interim bottom in the 1.2930area. From there, the EUR/USD selling pressure eased going in the US trading session. The US weekly jobless claims were slightly higher/worse than expected. There was very little reaction in the (currency) market, but the report didn’t help to improve sentiment on risk. After the close of the European markets, US equities gradually regained most of the earlier losses. This gave EUR/USD downside protection, too. Over the previous days, we already had the impression that sentiment on risk was better during the US trading session than was the case in Europe. EUR/USD closed the session at 1.2969, still a substantial loss compared to the 1.3048 close on Thursday. At the same time, we cannot but take notice of the fact that there was again not much hard news to really explain this move. When will the correction time/repositioning be over and when will the news flow again become the driver for the price action?
This morning in Asia, sentiment on risk improved slightly from yesterday. The gains are not spectacular but EUR/USD draws some comfort and is cautiously heading toward the 1.30 mark.
Later today, the calendar is very thin. There are hardly any eco data on the calendar in Europe and none in the US. There might be some headlines from politicians (Monti meets Samaras) but we doubt that they will provide any valuable information for markets. So, technical considerations will again play an important role. Is a one week correction after the August/early September risk rally enough for markets to find a new equilibrium? To be honest, we expect rather lacklustre trading in EUR/USD (and in most other markets) going into the weekend. We look out whether EUR/USD can avoid setting a new correction low. In a day-to-day perspective this could be a first indication that the correction is losing momentum. The pair regaining yesterday’s/Wednesday’s intraday highs would be an additional positive (1.3059/76/85 area). Given the poor momentum earlier this week, regaining this area won’t be that easy.
Technicals and LT view: EUR/USD touched a 2012 low at 1.2043 on July 24.
From there, EUR/USD rebounded after ECB’s Draghi said that the ECB would do whatever is needed to preserve the single currency. Later in August, the soft tone of the August FOMC minutes pushed EUR/USD above the 1.2444 range top, improving the short-term picture. Over the previous two weeks, EUR/USD cleared several important technical resistance levels, including the 1.2824 May 21 top. This swift break above this area clearly improved the technical picture of EUR/USD. Last week’s break above 1.2935 (68% retracement from 1.3487/1.2043) suggests that a full retracement is possible. 1.3284 (01 May top is the next high profile point of reference. The pair was heavily overbought and finally a correction kicked in . A setback below the 1.2630/1.2822 area (starting point of the post-payroll acceleration of the rally) would suggest that the rally is running out of steam and that some consolidation might be at hand. A buy-on dips approach in case of a more pronounced correction is still preferred.
On Thursday, USD/JPY returned to a more ‘normal’ trading pattern after the post-BOJ spike higher on Thursday morning. The least one can say is that this reaction to BOJ easing was quite disappointing. A few hours after the decision, USD/JPY was already below the levels at the time of the BOJ announcement. The rise of the yen continued yesterday, albeit at a much slower pace. Of course, the daily swings in sentiment on risk were no help. Nevertheless, the market is clearly not convinced that the BOJ will succeed in reaching its inflation target (and a weakening of the yen) anytime soon. Short-term, we look out whether the recent lows just above the 78.00 will hold. Also interesting to see whether USD/JPY would be able to profit in case core bund yields would turn a bit higher after the recent decline. Even if this would be the case, the post-BOJ action suggests that that it won’t be easy for USD/JPY to take out the 79.22/66 resistance area.
EUR/GBP at first still followed the price pattern of EUR/USD. For now this trend is still South. There was a temporary pause on Wednesday afternoon, but yesterday, the easiest way for the euro was still down. EUR/GBP easily joined this move. EUR/GBP fell below Wednesday’s intraday bottom early in Europe.
The poor French PMI reinforced the selling. The UK retail sales were close to expectations and were non big issue for trading. EUR/GBP filled offers in the 0.7990 area around noon. At that time, the CBI industrial trend orders came out better than expected. In theory, the report was supportive to the EUR/GBP downtrend, but we didn’t see an acceleration, suggesting that the global market trend/context is still much more important as a driver for EUR/GBP rather than country specific/UK eco data. Later in the session, the decline slowed, but EUR/GBP never gave the impression that a countermove might be on the cards.
EUR/GBP even failed to profit from the cautious rebound in EUR/USD late in the US. EUR/GBP closed the session at 0.7998, compared to 0.8044 on Wednesday evening. In an interview, BoE’s King maintained a very soft tone on the economy. At the same time, he indicated to find it acceptable for the UK not the meet its budget and debt targets in case of weaker than expected growth.
Today, the monthly UK budget data are scheduled for release. Recently, there was sometimes a limited intraday market reaction, especially in case of a below consensus/higher than expected figure. However, in the current euro negative environment, we assume any sterling negative reaction will be limited. The euro trend will probably be an important input for EUR/GBP trading. That said, we have the impression that sentiment on sterling is also improving a bit. If so, this might make any sustained rebound of EUR/GBP even more difficult than might be the case for EUR/USD.
From a technical point of view, EUR/GBP reached a correction low at 0.7755 at the end of July. The commitment of ECB’s Draghi to do whatever is needed to protect the single currency provided also a solid support for EUR/GBP and the pair reached a corrective top at 0.7963 mid-August. The top of this sideways pattern was broken two weeks ago as EUR/GBP regained the 0.7963 range top.
This break improved the technical picture. As the price action in both EUR/USD and cable was mostly driven by the dollar side of the story, we still saw less reasons for big gains in this cross rate than might be the case for EUR/USD. Until Monday, the day-to-day momentum remained EUR/GBP supportive, but from there, the topside in EUR/GBP became difficult. Strong resistance is seen just not that far above this week’s top (0.8153/69 previous reaction highs). This suggest that a cautious sell-on-upticks might be considered. Even so, tight stop-loss protection is warranted to defend the position in case of new strong upleg of the EUR/USD headline pair.