On Tuesday, a WSJ article indicated that Germany was considering to be less strict in its conditions on further aid for Greece. At the same time, there was a lot of market talk that the EU was making progress on a new aide package for Greece. This sparked a wave of global investor optimism. EUR/USD extended its rebound off the recent lows.
EUR/USD traders experienced an extremely boring trading session on Monday, but a simple press article was enough cause fireworks on Tuesday morning in Asia. A WSJ article said that Germany was considering dropping its push for an early rescheduling of Greek debt. There was also a lot of market talk from other sources who said to have knowledge that the EU was preparing a new aid package for Greece. These headlines apparently were enough to convince investors that the chances on Greek debt chaos were less big than feared until now. Stocks and the euro spiked higher in Asia and EUR/USD regained the 1.44 mark during the European morning session. Of course, any signs that the parties involved in the Greek debt debate are moving away from their extreme positions are positive. That said, yesterday’s reaction also suggests that the market of late had raised the risk of a scenario of some kind of Greek debt chaos next month. There was apparently some unwinding of this scenario to do. Regarding the data, the EMU CPI Flash estimate declined from 2.8% Y/Y to 2.7% Y/Y. The release had no impact on EUR/USD trading and this was also the case for labour market data from Italy, Germany and the EU. The focus remained on the Greek story. Even a set of poor US eco data (CS house prices, Chicago PMI and consumer confidence, all much weaker than expected) had only a very limited impact on global market sentiment. Equities preserved most of their gains and EUR/USD held close to the 1.44 mark. The pair closed the session at 1.4396, compared to 1.4282 on Monday evening.
Today, the calendar remains well packed. The final PMI in Europe will be published. The advance reading signalled a material slowdown in activity in May. Markets will also keep a close eye on the performance of the peripheral countries. More indications of slowing growth, especially in the periphery, might be a negative for the euro. The US calendar is even more interesting. The consensus expects the ADP labour market report to show that private employment growth has stabilized near 180 000. The PMI of the manufacturing sector is expected to decline from 60.4 to 58.0. Of late, the correlation between the ADP and the payrolls was not really strong. So, probably quite a wide deviation from consensus is needed for the ADP to have a lasting impact on markets. Even after last month’s ‘decline’, the ISM of the manufacturing sector was still at a very high level. A decline from 60.4 to 57.5 is expected. In theory, a more pronounced decline might stoke fears on the pace of global growth and weigh on overall sentiment on risk. However, it was remarkable yesterday that markets completely ignored a set of very weak US eco data. With respect to Greece, we assume that the impact of the WSJ article is more or less worked out. As there are still a lot of conflicting drivers in play to guide the price action, we continue to keep a close look at the technical charts.
We had a LT bullish strategy for the EUR/USD cross rate based on the different policy approach between the ECB and the Fed. However, after a long rally since early this year, extreme euro long positioning made the cross rate vulnerable to a correction. A forceful correction started as the ECB didn’t signal a rate hike in June as markets expected. Renewed uncertainty on Greece and the commodity correction reinforced the repositioning in EUR/USD, too. Over the previous two weeks, the pair showed some tentative signs of bottoming out, off from the intermediate low at 1.4048, even as the rebound was far from spectacular and as the pair temporary reached a new correction low below 1.40. This week, the rebound gained momentum. During the month of May, we changed our short-term bias for EUR/USD to negative. The pair is currently testing the 1.4442 resistance. A sustained rebound beyond this 1.4346/1.4442 area would call off the downward alert in this cross rate. Our sell-on-upticks approach is coming under pressure. However, we look out how this test turns out.
On Tuesday, trading in the USD/JPY cross rate showed two different faces. In Asia and early in Europe, the pair was well bid. Moody’s put Japan’s credit rating on review for a possible downgrade. This weighed on the yen (at least temporary). Later in the session, sentiment on risk was positive, especially in Europe, as markets took comfort from all kinds of news headlines that a new aid package for Greece was in the making. USD/JPY reached an intraday high at 81.77 during the morning session in Europe. USD/JPY had to return part of its intraday gains after the publication of poor US data (consumer confidence/Chicago PMI). However, equities stayed well bid and this also protected the downside in USD/JPY. The pair closed the session at 81.52, compared to 80.94 on Monday evening.
This morning, Asian equity markets trade mixed. China’s manufacturing PMI was reported at a soft 52.00 as measures to cool inflation are slowing growth. However, the report was in line with market expectations. USD/JPY is slightly lower this morning in line with the broader performance of the US currency. Later today, USD/JPY might be sensitive to the outcome of the US eco data, especially if they would affect US yields. Weaker than expected US data might weigh on this cross rate, even in case the impact on equities would be limited.
Over the previous month, USD/JPY developed an almost uninterrupted decline off from the early April correction high at 85.53. The move was a correction on the sharp decline of the yen early last month, but also mirrored underlying global dollar weakness. We looked to pick up the USD/JPY cross rate in the 80/81 area. This target area had been reached early this month. So, a tactical USD/JPY long position could be considered. The story on USD/JPY remains ambiguous, but the constructive sentiment on risk has given the pair downside protection of late. Last week, overall dollar weakness also weighed on this cross rate. We maintain a cautious positive bias for this cross rate. Stop-loss protection to defend return action below 80.00/79.57 area remains warranted.
On Tuesday, EUR/GBP for a large part joined the broader rebound of the euro, supported by press articles and comments from several sources that the EU is making progress on an new aid package for Greece. Of late, sterling showed some signs of underlying resilience, but this was obviously no longer the case yesterday. Cable strongly underperformed EUR/USD. There were no important eco data in the UK yesterday. In a speech, BoE’s Sentence repeated its view that the failure to raise rates to fight inflation risked undermining the BoE’s credibility. However, his assessment is well-know and didn’t affect markets. EUR/GBP closed the session at 0.8753, compared to 0.8669 on Monday evening.
Today, the UK PMI for the manufacturing sector and the April lending and money supply data will be published. Over the previous month, the series already showed slowdown in activity in the sector. Nevertheless, we have the impression that weaker than expected data might still cause some further damage for the UK currency. After the close of the European markets, BoE’s Tucker will speak in London.
We have a LT EUR/GBP bullish view. The ECB’s firmness to rein in inflation contrasts with the BoE MPC’s attitude of postponing a rate hike despite ongoing skyhigh inflation readings. The EUR-GBP interest rate differential increased accordingly and pushed the pair beyond the 0.90 mark early May.
EUR/GBP reached a correction high north of 0.9000 early May. After the May press conference, a forceful correction kicked in and the pair extensively tested the 0.8715/0.8654 support area (previous lows). At that point, we reinstalled a buy-ondips approach in line with our LT sterling negative bias. A cautious rebound started, but last week the pair dropped again temporary below the 0.8654 support. Yesterday’s rebound suggests that the test is rejected and that the downside is again better protected. So, a buy-on-dips approach remains favoured.
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