KBC Sunrise Market Commentary: ECB kept policy unchanged

On Thursday, sentiment on risk remained positive in Asian and European trading.This continued to support the euro. EUR/USD set a minor correction high in Asia,but no real break occurred. The pair settled in a tight range in the mid-1.26 area goinginto US trading and awaiting the ECB press conference. The US jobless claimswere too close to expectations to move the market. At the ECB press conference Mr.Trichet avoided to make any high profile comments on market interest rates (eonia),on the bond purchases and on the stress tests. The exchange rate of the euro wasalso no issue. The ECB President pointed out that a series of measures had alreadybeen taken to address the problems in Europe and in several individual countries andsuggested that markets had not fully discounted the impact of these steps yet.EUR/USD gained a few ticks during the press conference and tested the Asian highs,even as the ECB president refused to give any additional details on the stress testsfor the banking sector. The euro stayed well bid and the positive start of the US equitymarkets caused EUR/USD to go for a test the 1.27 mark. However, traders werestill cautious to push the pair aggressively higher beyond that key resistance area.The pair closed the session at 1.2698 compared to 1.2638 on Wednesday.

On Wednesday, it looked as if the rebound of EUR/GBP was running into resistanceas the pair failed to move beyond Tuesday’s high. EUR/GBP also started Thursday’strading on a poor footing. However, the UK data came out weaker than expected (anunexpected M/M decline of the Halifax house prices, a rather steep downward revisionof the April production data). These data weighed on sentiment toward the UKcurrency. EUR/GBP started a new up-leg, also supported by a decent bid for the eurooverall. The BOE policy meeting brought no new input for markets. EUR/GBPtouched a new recovery high in the 0.8380 area and is still close to that area thismorning.

The improved sentiment on the equity markets finally triggered also a nice reboundin the ccy/JPY cross rates. USD/JPY already succeeded quite a decentprogress in Asia. The rally took a breather during the morning session, but a new uplegstarted early in the US. This move was support by strong EUR/JPY buying interest. Yesterday evening, the US in along-awaited report on trade practices declined to label China as a currency manipulator.Nevertheless, the US Treasury repeated that the yuan is still undervalued. Thereaction on the currency market is limited. The South Korean Won extended its reboundas the Bank of Korea raised its interest rate from 2.00% to 2.25%. The movewas somewhat of a surprise for the market. Asian equity markets (including Korea)are showing moderate gains this morning. This continues to weigh on the yen. Marketskeep also an eye on the election for the upper House in Japan. In case PMKan’s Democratic Party would lose this election, it might hamper the government’s effortto reduce the fiscal deficit. However, at least for now, the outcome of this electionis no big issue for the (currency) markets.

Today, the calendar of eco data is again very thin, with only some second tier ecodata on the agenda in Europe. So equity markets will again decide on today’sfate of the major currency cross rates. After two days of gains, the question iswhether equities will be able to keep a positive bias going into the earnings season.We wouldn’t be surprised to see the market shifting to a wait-an-see mode todayand this would also slow the recent moves in the currency market. EUR/USD isstill testing the 1.2673/1.2675 (Reaction high/Long-standing downtrend line since December)area. Sustained trading north of this area would be a technical signthat the correction might have some further to go. Nevertheless, we still don’t feelforced to aggressively play such a break higher as long as there is not really a fundamentalstory to support such a move.

In the UK, the trade balance figures and the producer prices are on the agenda. Usuallythese data are of no major importance for currency trading. Recently, EUR/GBPmade decent rebound from the 0.8067 reaction low. The pair is now nearing a firstimportant resistance area (0.8400/0.8443). With no high profile news features on theagenda, we wouldn’t be surprised to see this moving slowing.