On Tuesday, EUR/USD was on the back foot at the start of trading in Europe.
There was not one specific factor behind the move. European equities came soon under pressure despite a positive overhang from a strong close in the US on Monday. Poor French business confidence was not the trigger for the fragile sentiment on risk in Europe, but it didn’t help. EUR/USD dropped to the 1.3020/25 area (Monday intraday support) and stayed there during most of the morning trade. Negative headlines on Spanish Q3 growth and on the Spain 2012 budget might have weighed, too. The Spanish Treasury Minister tried to provide a more positive story on the Spanish public finances, but the comments didn’t change the course of events on global markets. At the onset of trading in the US, the USD succeeded another upleg inspired by a further setback in sentiment on risk, at least partially inspired by disappointing corporate earnings. EUR/USD dropped below the 1.30 big figure. The Richmond Fed manufacturing index was much weaker than expected. At the same time, European consumer confidence was marginally better than expected. The pair stayed under pressure early in US dealings reaching an intraday low at 1.2952 just after the close in Europe. The risk-off storm eased further down the road, also slowing the decline of EUR/USD. EUR/USD closed the session at 1.2987, still a decent loss compared to the 1.3060 close on Monday evening.
This morning in Asia, sentiment on risk isn’t that bad if compared to the steep losses in the US and Europe yesterday. Asian markets trade mixed ‘supported’ by an improvement in the Chinese HSBC manufacturing PMI. EUR/USD is holding near yesterday’s closing levels.
Later today, the calendar is well-filled. The first estimate of the EMU PMI’s and the German IFO indicator should provide some up-to-date info on the health of the EMU economy. The consensus is expecting a slight improvement for both indicators. If so, this might support the feeling that the European economy might enter some kind of bottoming out phase, which would also be a slightly supportive for the euro. Later in the session, ECB’s Draghi gives a briefing for German lawmakers on OMT. The meeting takes place after closed doors, but there will be room for questions afterwards. In the US, the outcome of the new home sales is wild card for trading. A positive surprise might be (slightly) supportive for sentiment on risk. Later in the session, the FOMC policy decisions will be published. However, after last month’s bold action, one might expect the Fed to maintain its assessment on the economy and its policy intentions. If so, the Fed communiqué shouldn’t be a big issue for currency trading. As always, Greece, Spain and overall sentiment on risk will also have their say on the EUR/USD price action. Sentiment on risk is apparently a bit more constructive than was the case yesterday. Greece is rather close to an approval of its news austerity measures in parliament and this might also lead to an agreement with Europe on an extension of the aid package for the country in the near future. If so, it might a positive factor for sentiment on European assets, too. Of course, politics is always a binary event risk.
To summarize: yesterday sentiment was risk-off. This was in the first place equity driven. This morning, sentiment is a bit more constructive. So, the setback in EUR/USD might slow. Of course, there is also still no high profile trigger to kick-start an new EUR/USD up-leg. So, more sideways trading in the current consolidation pattern can be expected. Within this range we still prefer to buy EUR/USD on dips.
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 mid-September. At that point, the pair was heavily overbought and a correction kicked in. EUR/USD reached a correction low at 1.2804 at a start of October but our key 1.2630/1.2822 support area (starting point of the early September acceleration of the rally) was left intact, keeping the MT picture in this cross rate constructive and building a base for a next up-leg. Earlier last week, the pair finally regained the intermediate top at 1.3072, opening the way for a retest of the 1.3172 September top, but it couldn’t sustain and some modest profit taking occurred, without technical implications though. On the downside, the MTMA comes in at 1.2985 (currently under test). EUR/USD should soon return/hold north of this reference to keep the day-to-day positive momentum intact. 1.2804 is still the line in the sand medium-term. We maintain our EUR/USD medium-term positive bias.
On Tuesday morning USD/JPY reached a new correction top in the 80.00 area. as investors continued to trade on the expectations for forceful easing at the October 30 BOJ meeting. Later in the session, the USD/JPY rebound clearly lost momentum as sentiment on risk deteriorated in Europe and in the US.
Nevertheless, the USD/JPY cross rate held remarkably strong given the rather sharp losses in markets of risky assets and given the decline in US bond yields.
The pair reached an intraday low at 79.72 early in Europe. This level was revisited after the open of the US equity markets, but finally USD/JPY ignored the losses on the equity markets and even recouped most of the earlier losses.
The dollar was well bid across the board. Even so, USD/JPY remained remarkably strong probably in the first place inspired by yen weakness in the run-up to the BOJ meeting rather than dollar strength.
This morning, USD/JPY traders apparently don’t know which card to play.
Sentiment on risk is not that bad, but still fragile. Yesterday’s price action at least suggests that the downside in the USD/JPY cross rate is rather well protected going in the next week’s BOJ meeting, even in case global sentiment on risk falters. The USD/JPY momentum is clearly positive and there is no reason the row against the tide at this stage. The June top (80.62) is the next high profile point of reference on the technical charts.
On Tuesday, EUR/GBP returned to its usual trading pattern in case of a setback in global sentiment on risk. Cable outperformed the decline of EUR/USD, pushing EUR/GBP off Monday’s top. The UK September loans for house purchases were stronger than expected but had no noticeable impact on EUR/GBP trading. Global sentiment on risk and the EUR/USD performance continued to set the tone for EUR/GBP trading. The pair reached a correction low at 0.8124, leaving Monday’s correction low (0.8123) intact. From there, EUR/GBP reversed part of the earlier losses. So, in the end, the gains of sterling against the euro were still limited. After the close of the European markets, BoE’s King in a speech said that the BoE is still ready to inject more cash in the economy if recent positive signs fade. At the same time, he kept a more neutral tone than was already visible in recent communication as he said that the BoE will “think long and hard” before it decides whether or not to make further asset purchases. It sounds as if more QE is not a done thing yet.
Nevertheless, the headlines from the speech had no negative impact on the EUR/GBP cross rate. The pair closed the session at 0.8140, compared to 0.8155 on Monday evening.
Today, the CBI industrial trends orders will be released. A further moderate improvement is expected. We don’t have any reason to distance ourselves from consensus. However, we still are keen the see the market reaction in case of decent UK eco data. Will some uncertainty on QE finally creep into this market? That said, in EUR/GBP will still be affected by the overall sentiment on risk and by the performance of the headline EUR/USD pair, with strong resistance ahead. In a day-to-day perspective, we don’t anticipate/preposition for a big leap higher.
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 a U-turn in EUR/GBP with the pair setting a top at 0.8115 mid-September. The price action in both EUR/USD and cable is for an important part driven by global sentiment on risk. In a risk-on context, EUR/USD tends to outperform cable, thus supporting EUR/GBP. As the risk-on rally ran into resistance mid September, the balance between EUR/USD and cable changed temporary, pushing EUR/GBP into a correction (low at 0.7923). A new rally developed last week and EUR/USD took out the 0.8114 top. The 0.8169/71 area (reaction high/2nd target double bottom) is now coming in the picture. The MT picture in this cross rate remains constructive and a break above the 0.8169/0.8222 resistance might be on the cards in case the ECB starts buying bonds under OMT. That said, the pair had a good run of late and is moving into overbought territory. So, partial profit taking/stop loss protection can be considered to defend the position against a potential (ST) rejected test of the key 0.8169/71 resistance.