Yesterday morning, the USD/JPY cross rate came under moderate pressure as the decline of EUR/USD and EUR/JPY weighed on the headline pair. USD/JPY reached an intraday low at 78.11 early Europe and settled slightly above that level during the morning session in Europe. In the afternoon trade, the yen ‘enjoyed’ quite a substantial setback on comments after the G7 conference call that was said to discus …….the Spanish and EMU debt crisis!! There was not much concrete news on Europe from the G7 conference call, but Japanese Fin Min Azumi said that he told the conference that the strong yen and falling stock prices posed a risk to the Japanese economy. This was seen as Japan keeping the door open for (solo) interventions. USD/JPY jumped to the high 78 area. There was a small setback in the pair later in the session. This morning, USD/JPY was again in the high 78 area as sentiment on risk is quite constructive in Asia.
USD/JPY is now off the recent lows, but we don’t see much room for a sustained rebound with the debate on more QE in the US still well in place. So, more consolidation around the current levels is expected for now.
On Tuesday, trading in the sterling cross rates developed again in thin market conditions as London markets were closed for the Diamond Jubilee of the Queen. There was of course little in the way of economic news to guide the price action in sterling. The downgrade of the UK sovereign credit rating to AA minus caused some headlines, but the impact on sterling trading was limited.
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The EUR/GBP cross rate for most part joined the broader move of the euro. After Monday’s rebound, the way was again south for the euro. EUR/GBP reached an intraday high at 0.8141 and this was already seen as opportunity to sell the euro. The news flow on Spain was confusing, to say the least as Spanish officials suggested that, at the current funding levels, there country was cut from the market. At the same time they tried to make the case for an EMU solution (recapitalization) of the Spanish banking sector. This political wrestling weighed on the euro and EUR/GBP turned also south. The pair returned to the 0.8100 support area/Neckline, but a clean return below didn’t occur. EUR/GBP closed the session at 0.8095, compared to 0.8125 on Monday evening.
Overnight, the BRC shop price index came out in line with expectations (1.5% Y/Y). Later today, the construction PMI will be published. We expect this indicator to be only of intraday significance for EUR/GBP trading. We don’t expect the ECB meeting to be euro supportive, but investors will stay cautious on sterling ahead of tomorrow’s BoE meeting. We expect more sideways trading in the 0.81 area short term.
From a technical point of view, the EUR/GBP cross rate is showing tentative signs that the decline is slowing. Early May, the key 0.8068 support was cleared. This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950. From there, a rebound kicked in/short squeeze kicked in. The pair broke temporary above the MTMA, but at first gains could not be sustained. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected two weeks ago and the pair returned lower in the range, but the 0.7950 range bottom stayed intact. On Friday, the pair returned to the range top and 0.8100 area was regained on Monday. This break improved the short-term picture in this cross rate. The targets of the DB formation are seen at 0.8233 and 0.8254. So, the correction might still have some further to go. We look to sell into strength, but are in no hurry yet to add to EUR/GBP short exposure already at this stage.
