On Thursday morning, EUR/USD traders faced some negative headlines when they arrived at their desks. S&P downgrading Spain to BBB minus was the most important one. At the same time, there were more signs of a further deceleration in growth in Asia (and in other EM markets) as South Korea cut its policy rate and revised downward its growth outlook of this and next. The unexpected rate cut in Brazil brought a similar message. So, sentiment on risk was fragile in Asia. EUR/USD set an intraday low at 1.2826 already long before the open of the European markets. However, the key 1.2804 support was left intact.
Sentiment on risk was still negative at start in Europe, but the damage across the European markets was limited. The spread widening in Spanish and Italian bonds was moderate and so were the losses on the European equity markets. Of course, EUR/USD had already lost quite some ground on all kinds negative headlines on Spain earlier this week. Apparently, there was some selling-fatigue on this theme. The Asian low in EUR/USD was not challenged anymore and EUR/USD tried to regain some ground. Admittedly, the gains were no spectacular and, as was the case on Wednesday, the 1.29 mark proved a tough resistance. The Italian bond auction was OK. The auction results had no impact on EUR/USD trading, but at the same time they confirmed that the S&P downgrade of Spain had not role the play anymore for EUR/USD trading.
EUR/USD attacked and finally broke the 1.2915 resistance (Wednesdays intraday highs) just after noon in Europe as sentiment on risk in improved further going into the US trading session. At first there was only a very limited risk-on reaction on the US eco data (trade balance in line; Claims much lower/better than expected but due to a sharp move in one state (one-off?)). Risky assets finally found a better bid. The improvement in sentiment coincided with headlines that the EU might delay the implementation of the new Basel rules. It is not clear whether this was really the trigger for the risk rally but EUR/USD filled offers in the 1.2950 area late in Europe. Later, US equities lost momentum and EUR/USD came off the highs, too. The pair closed the session at 1.2928, compared to 1.2875 on Wednesday evening.
We retain from yesterday’s price action that global markets (including EUR/USD) are quite resilient to negative headlines on Spain. Global growth is the another big issue. We see a similar market attitude as is the case for Spain.
This morning, Asian equity markets trade mixed, mostly slightly in the red.
EUR/USD tried revisit yesterday’s top, but there is no strong enough driver.
Traders’ keep an eye on the headlines from the IMF/World Bank meetings in Tokyo.
Later today, markets will keep an eye at the EMU production data for August. In the US, the PPI and the preliminary release of the Consumer confidence of the University of Michigan will be published. From these three data series, we assume that the Michigan consumer confidence has the better chance to cause some intraday price action. The effect will go via the usual risk-on/risk-off pattern. The results from Wells Fargo and JP Morgan before the open in the US are a wildcard for sentiment on risk. There will also be a be plenty of headlines from policymakers participating at the IMF/World Bank annual meeting in Tokyo. We doubt that they will yield any hard result. The pleadings for more time for Spain and Greece are in the spotlights. At the margin, they might be slightly supportive for risk (and maybe also for EUR/USD). However, at this stage we don’t see a trigger that might enable EUR/USD to break out of the 1.28/1.31 consolidation pattern. In a day-to-day perspective we see more sideways price action. The downside in EUR/USD has become a bit better protected. The Oct 01 correction low at 1.2804 remains the first point of reference.
Technicals and LT view: EUR/USD rebounded from the 1.2043 end July low after ECB’s Draghi committed to do whatever is needed to preserve the euro. Soft Fed speak and bold action at the September 13 meeting helped EUR/USD to reach a top at 1.3172. At that point, the pair was heavily overbought and finally a correction kicked in. However, our key 1.2630/1.2822 area (starting point of the early September acceleration of the rally) was left intact. EUR/USD reached a correction low at 1.2804 early last week. From there, a gradual rebound started and EUR/USD set a recovery high at 1.3072. This brought the 1.3172 September reaction high in the picture. In a day-to-day perspective, EUR/USD tries to regain the MTMA (1.2925 today). This suggests that the ST downside pressure is easing. The 1.2804 reaction low should hold short-term. A break below this level could signal a further setback. We put stop-loss protection in place to defend EUR/USD longs against break below. We maintain our EUR/USD positive bias Medium term.
On Thursday, the intraday trading range in USD/JPY was wider than it was the previous days. However, in a broader perspective, the pair still develops an almost perfect sideways consolidation pattern. The pair reached a ST correction low at 77.95 at the onset of trading in Europe. The moderate reaction on European markets to the S&P downgrade of Spain put a floor for this cross rate too. A better risk-on sentiment at the start of trading in the US and a low/good jobless claims report in the US pushed USD/JPY to an intraday top at 78.59. The move was supported by an albeit limited rise in US bond yields. This move in the US bond markets was completely reversed later in the session. USD/JPY still preserved some of the early gains. The pair closed the session at 78.34, compared to 78.18 on Wednesday.
This morning, USD/JPY is holding up quite well, even as global sentiment on risk remains fragile in Asia. For now this remains a story of range trading. That said, we have the impression that the downside is quite well protected. So, a test of the topside of the range (78.78/79.22 area) might be on the cards.
On Thursday morning in Asia, EUR/GBP set a correction low at 0.8022 as the impact from the S&P downgrade of Spain weighed. Some hawkish comments from BoE member Weale overnight (the policymakers suggested that more QE might be compatible with the BoE inflation target) might have been a (minor) factor for the sterling outperformance, too. EUR/GBP changed hands in the 0.8035 area at the start of trading in Europe. As was the case for EUR/USD, the negative impact from the S&P downgrade and from other negative headlines on European markets was limited and EUR/GBP took also the way north again. The pair moved beyond and tested the 0.8062 ST resistance (Wednesday’s top) around noon and did break beyond this level later in the session. The late session setback in US equities also prevented further risk-on gains in this cross rate. Yesterday’s break was again a purely euro move. There was very little in the way for UK (eco) news. EUR/GBP closed the session at 0.8057, compared to 0.8044 on Wednesday.
This morning in Asia, EUR/GBP is holding close to yesterday’s intraday top. As is the case for EUR/USD, we also have the impression that the day-to-day momentum in EUR/GBP is improving. After the correction earlier this week, the downside has become better protected. Later today, the UK eco calendar is empty. Global factors and the overall sentiment on the euro will remain the key factors for EUR/GBP trading.
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 triggered also a U-turn in EUR/GBP. The pair reached a corrective top at 0.7963 mid-August. A new up-leg early September pushed EUR/GBP even beyond this level. This break improved the technical picture. The price action in both EUR/USD and cable is for an important part driven by the dollar side of the story and by global sentiment on risk. In a risk-on context, EUR/USD tends to outperform cable, thus supporting EUR/GBP. As the risk-rally ran into resistance mid September, the balance between EUR/USD and cable changed, pushing EUR/GBP into a correction. Two weeks ago, the correction lost momentum. We reinstalled a cautious buy on dips approach for return action higher in the 0.7923/0.8115 trading range. This week’s setback in the pair was slightly disappointing. Nevertheless, even after this correction, EUR/GBP is still fairly close to the 0.8115 range top. Investors probably need a clear improvement in global sentiment on risk to try a new attempt to break above this level. As this is not available, EUR/GBP might see some consolidation short-term. We maintain on MT positive bias in this pair.