Dollar extends rebound
June 5, 2008 – 5:52 amby KBC Market Research Desk
On Thursday, EUR/USD extended its correction lower. This was mostly technically driven. The intra-day (inverse) correction between de dollar and oil prices was far less obvious than on Wednesday, even if it is often mentioned as the explanation for the move. Both the European data (M3, en EC business confidence indicators, among others) and US data (Claims and GDP revision) had a limited impact on trading. Aside for technical considerations (EUR/USD dropped below the 1.56 neckline double bottom) we also assume that markets considers the change in the European interest climate as mostly priced in. Investors now apparently tend to give more attention to the recent warnings of the Fed that interest rates might be raised rather soon in order to contain inflationary pressures. Whatever the reason, EUR/USD closed the day again lower (fro the third day in a row) at 1.5530 compared to 1.5639 on Wednesday.
Today, the European calendar contains the EMU CPI and unemployment data. In the US the Michigan confidence and the Chicago PMI will be published. There are also speeches of ECB hawks Weber and Stark on the agenda.
The European inflation figure will be an important headline for the markets, especially as the risk is for the report the come out above the consensus (3.5%). However, over the previous two weeks, we have the impression that the high European inflation and the need for the ECB to maintain a restrictive monetary policy has become less of a driver for Euro trading. This is also the case for (hawkish) ECB declarations. The US data and even more oil tend to gain influence. Regarding the US data, the Chicago PMI and the Final Michigan consumer confidence are expected to stabilize at very low levels.
This week the EUR/USD rebound obviously ran out of steam and the inability to clear the 1.5815 short-term range top triggered profit-taking in this pair. The correction in oil prices was also a good excuse to close dollar short positions. On top of that, one might assume that the (interest rate) markets already price in a lot of euro supportive news as they point to a decent chance of an ECB rate hike towards the end of the year, while hawkish Fed comments caused markets pondering the chances of an early Fed rate hike.
In a medium term perspective, we have a neutral bias on EUR/USD. We expect the pair to continue trading in the 1.5285/1.6020 range as long as visibility on the economic picture in the US and Europe remains low. Short-term, the intermediate resistance at 1.5815/20 (reaction high) proved a hard nut to crack. Over the previous sessions, we advocated a sell-on-up ticks strategy in a day-to-day approach. We hold on to that bias. Yesterday’s correction below the 1.5600 neckline opened de way for return action to the lower part of the medium term trading range. This morning, lower oil prices (despite poor US inventories yesterday) also suggest that oil might continue to be a factor of help for the dollar. Of course, with oil you never know!
Yesterday, also USD/JPY extended the rebound that started earlier this week and the drivers were the same as for other USD cross rates. Stocks performed reasonable well (even if not euphoric), oil was still downward oriented (despite some intraday gyrations) and the US data contained no obviously dollar negative information. In the current environment, this mix is apparently enough for the dollar to make progress. The pair even briefly moved above the key 105.69 level, but the gains could not be sustained. USD/JPY closed the session at 105.49 (compared to 104.69 on Wednesday).
This morning, the Japanese inflation data came out mixed with the timelier Tokyo CPI slightly higher than expected, but the national April data slightly lower than expected. The Japanese unemployment rate unexpectedly rose from 3.8% to 4.0%, suggesting that the global slowdown might filter through further into the Japanese economy. As usual this had only limited immediate impact on the yen.
After a rebound from mid March to early May, USD/JPY settled in a narrow trading range throughout the month of May. A first attempt to break above the range top in the 105.69 proved very difficult. However, on the downside the test of the 102.55 neckline was also rejected last week and indicated that the downside in this pair remains rather well protected. Over the previous days we had a buy on dips approach looking for a retest of the short-term range top at 105.69. This level was tested yesterday, but again no clear break occurred yet. As indicated yesterday, for a sustained break of this level probably some external help from oil or stocks (or both) is needed. However, we still have the feeling that the underlying sentiment gradually grows a bit more dollar positive and in this respect we think that there is a chance for the pair to make a second attempt to break above the key 105.69/105.95 area in the days to come. Of course, the key US data next week will have an important say whether or not such a break will be sustainable longer term.
Yesterday, also EUR/GBP extended the correction that started earlier this week. As was the case for EUR/USD, technical considerations played a role as the pair dropped below the 0.7920 support area two days ago. This fuelled the market feeling that also the upside momentum is this pair is blocked for now, triggering additional selling/profit taking in this pair. In the morning, the sterling already ignored very poor Nationwide house prices. Later in the session, the CBI distributive trades report came out better/less negative than expected and this reinforced the sterling rebound. EUR/GBP closed the day at 0.7852 compared to 0.7940 on Wednesday.
Today, the UK calendar is empty. Overnight, the GFK consumer sentiment came out very weak, but once again this was ignored by the sterling.
Since mid April, EUR/GBP develops a consolidation pattern after the steep sterling losses of the previous months. We took profit on EUR/GBP latest rebound last week, as we doubted the overall short-term upside potential of the euro. We remain sterling skeptical longer term. However, short-term we have the impression that markets have grown somewhat less negative on the sterling and a EUR/USD correction also tends to filter through into EUR/GBP trading. The confirmed break below the 0.7920 area/short term range bottom now opens to way for the pair to revised to MT range bottom in the 0.7766/46 area. From there, the correction could become (much) more difficult, we think.
