On Monday, there was no exciting story to tell on EUR/USD trading. It was a risk off trade. There were no important eco data on the calendar. So, markets could not but focus on the failure of US politicians to reach an agreement on the US budget and on raising the US debt ceiling. In theory this should be a negative for US assets. However, it was in first place a factor of global investor uncertainty. In this respect it was also no help for the euro. In addition, the European debt crisis still played a role too, even after last week’s EU rescue plan for Greece. Moody’s downgrading the Greek debt to Ca brought the issue of the debt restructuring again in the picture. During the session, the credit spreads of the likes of Italy and Spain widened again sharply. This indicates that also fear for contagion towards other European countries is not removed after last week’s EU plan/decision. So all this kept EUR/USD jumping up and down in a sideways trading range within the 1.43 big figure. EUR/USD closed the session at 1.4377 compared to 1.4360 on Friday evening.
Overnight, President Obama in a speech called on congressional leaders to make a compromise on the US debt ceiling. However, the key message from Obama’s speech was that there is no progress in the this debate. This view was reinforced by the reply from top Republican John Boehner. Even as there was not much new in Obama’s speech, the dollar was hit hard in Asia this morning. EUR/USD jumped to the high 1.44 area and the US currency reached another historic low against the Swiss franc. The trade-weighted dollar dropped below the 74.00 big figure.
Today, the calendar in Europe is very light. Markets might keep an eye at the auction of 3- and 6- months T-bills in Spain. In the US, the CS house prices, consumer confidence, the Richmond Fed manufacturing index and the new home sales will be published. We keep an eye on the consumer confidence indicator and the Richmond Fed index. Once again, the impact of these data series will most probably go via the equity markets and be temporary in nature. Nevertheless, the focus will be on the debt story, in the US but also in Europe. The key question is which story will prevail today. Will it be the stalemate on the US debt ceiling? In this respect, it will also be interesting to see the results of the US 2-year note auction. Or will it be the risk of contagion on the European bond markets, as mirrored in the spread widening of the likes of Spain and Italy. After the overnight decline of the dollar, it looks that the focus in markets has tilted to the US side of the story. However, we remain cautions to jump on a move that occurred/started in relatively thin trading conditions in Asia. One might expect more erratic, volatile trading in all USD cross rates and in particular in EUR/USD. In this context, one can not but keep a close eye on the technical charts. It is very difficult to see in which direction the balance will tilt today. Yesterday, the loss of the euro was limited, given the spread widening in Italy and Spain while the overnight move suggests that the dollar is becoming more vulnerable. So, the day-to-day momentum in EUR/USD might be slightly to the upside.
We had a LT bullish strategy for the EUR/USD based on the different policy approach between the ECB and the Fed. After a sharp correction in the first half of May, the EUR/USD cross rate bottomed out. The Greek debt crisis prevented a forceful rebound, but at first the EUR/USD cross rate easily held above the 1.4074/1.3970 range bottom. However, we turned cautious on the single currency as soon as Italy came in the spotlight of the EMU crisis two weeks ago. EUR/USD reached a minor new low at 1.3837 on the Italian debt woes. Last week, markets grew more confident that the EU would be able to reach a workable compromise on the Greek debt crisis and that the EMU would also be able to reduce the risk of contagion. Thursday’s statement brought a moderately positive outcome assessment and helped EUR/USD to return higher in the previous trading range, even as there Was/is no euphoria. The pair is now well the 1.4282 previous high and above the downtrend line from the year high. This has called off the downward alert in this cross rate. We changed our short-term assessment from negative to neutral. A sustained break above the 1.4440 area would improve the shortterm picture in this cross rate. However, we still remain cautious to jump on this move. This remains a binary risk.
On Monday, USD/JPY trading developed again in a rather narrow trading range in the lower half of the 78.00 big figure. The dollar was under moderate pressure in Asia and early in Europe, but a real attack on the 78.00 mark didn’t occur. Risk on sentiment continued to support the yen, but investors apparently were still reluctant to fight the warnings of Japanese policymakers on the strength of the yen. USD/JPY closed the session at 78.29, compared to 78.54 on Friday evening.
Overnight, USD/JPY set a correction low below 78.00 in the broader USD sell-off after the speech of President Obama. However, there was a strange, brief spike higher immediately after. The spike is said to be liked to position squaring as there where no indications/rumours on BOJ interventions. However, this move was also very short-lived. USD/JPY is again close to the 78.00 mark at the moment of writing. So after all, the dollar is still fighting an uphill battle, also against the yen. Japanese Fin Min Noda maintained its warning against pushing up the yen.
Of late, there was no clear market theme guiding trading in the USD/JPY cross rate as the pair held a tight sideways trading range between 79.57 and 82.23. However, global uncertainty on the EMU debt crisis finally left its traces on this cross rate, too. The pair dropped below the 79.57 range bottom. This made us close USD/JPY long positions. There is no reason to row against the tide, especially as the chance for successful BOJ/fin Min interventions is far from sure, as long as the dollar remains under pressure across the board. So, the risk is for USD/JPY to continue drifting lower.
On Monday, EUR/GBP again hovered up and down in the lower 0.88s. The pair dropped to the 0.88 barrier. However, calls from UK politicians and uncertainty going into today’s Q2 GDP release prevented further gains of sterling. So, EUR/GBP returned higher in the range. However, as there was no clear driver and as contagion on EMU sovereign bond markets was still on the radar, the rebound of the euro had also no strong legs. EUR/GBP closed the session at 0.8809, compared to 0.8833 on Friday.
This morning sterling traders found themselves between a rock an a hard place. On the one hand, investors remained very reluctant to go sterling long ahead of the Q2 GDP release. On the other hand, the speech of Obama hit the dollar across the board. In this context, EUR/USD outperformed cable and by consequence EUR/USD jumped higher off from the 0.8825 area.
As indicated, the UK Q2 GDP release will be the key issue. The consensus expects a very moderate 0.2% Q/Q rise. If so, this would only confirm the very lackluster growth momentum of the UK economy and might reactivate calls for more QE inside and outside the BoE. Of course, after the losses of sterling against the euro this morning, one might assume that the market is already positioned for a weak figure. So, we probably need another negative Q/Q growth to trigger further sterling losses short-term.
We have a LT EUR/GBP bullish view. The ECB’s firmness to prevent inflation from filtering through into the economy contrasts with the BoE MPC’s attitude of postponing a rate hike despite ongoing sky-high inflation readings. Last month, the downside in this cross rate remained well protected, even as the Greek debt crisis came back in the spotlights. The BoE minutes of the June meeting suggested that the BoE is closer to additional QE rather than to a tightening of monetary policy. This prevented any sustained rebound of the UK currency. Even during the recent flaring up of the Greek/EMU debt crisis, the EUR/GBP cross rate didn’t break any really high profile support levels yet. The 0.8721 level (16 June low/neckline) was extensively tested last week, but no sustained break occurred. We didn’t change our LT view on EUR/GBP yet. However, during the recent crisis, we couldn’t but turn more cautious on all euro long exposure until a comprehensive plan was in place. After last week’s EMU debt plan, short-term event risk on the euro zone has declined. So, the downside in the EUR/GBP cross rate looks rather well protected for now.
