KBC Sunrise Market Commentary: Currencies: EUR/USD extends gains after US payrolls report

On Friday morning, investors were awaiting the outcome of the key US payrolls report. Nevertheless, sentiment to risk remained constructive already at that time. This kept EUR/USD well bid, with the pair comfortably holding above the 1.28 handle. The US payrolls came out materially better than expected. This was an obvious positive sign for equity investors and for the buyers of other riskier assets. EUR/USD gained some ground, but traders still reacted with some reservation. This release had of course also a US-supportive aspect. A weaker than expected ISM of the nonmanufacturing sector in the US caused even a temporary blip in the rise of equities and of EUR/USD. Nevertheless, finally the risk story prevailed and EUR/USD joined the rebound on the equity markets. The pair closed the week near the highs at 1.2896, compared to 1.2825 on Thursday. The pair regained the 1.2872 38% Fibonacci retracement level, but a real test of the 1.2923 resistance (mid August high) didn’t occur.

Today, the calendar of eco data and events is almost empty. US markets are closed for the Labour Day holiday. In Europe, there are also hardly any eco data on the agenda. So, investors will continue to try to asses the consequences of last week’s US eco data. At least for now, risk appetite apparently remains the key driver for EUR/USD trading. This morning, Asian equity investors also joined the positive global reaction. So, even as there will probably be little in the way of hard news to guide EUR/USD trading today, sentiment will probably remain EUR/USD constructive. In this respect, we also notice that there is no outperformance of the European bond markets compared to the US. In other words, at least for now the string of positive US eco data of last week hardly provides the US currency with any additional interest rate support vis-à-vis the single currency.

MT picture and technicals. From early June to early August, EUR/USD succeeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro due the European government debt crisis. In addition, during June and July, European eco data came out reasonably good. At the same time, US data suggested a cooling down in the pace of the recovery in the US. Interest rate differentials between the US and Europe (Germany) turned sharply to the disadvantage of the US currency. EUR/USD reached a recovery high at 1.3334 early August, going into the Fed August meeting.

At this meeting, Bernanke and Co admitted the slowdown in US growth and kept the door open for additional monetary stimulus (QE). Intrinsically, one would expect this to be a USD negative message from the Fed.

However, the (currency) market played another card after the Fed meeting. Global risk aversion came again to the forefront and uncertainty on the global recovery was still seen a USD supportive factor, even as the negative surprises came from the US rather than from Europe. So, the EUR/USD currency pair was captured in a downward correction. This move is in the first place driven by global market sentiment rather than by the specific economic news flow from the US or Europe. Two weeks ago, the EUR/USD decline slowed/bottomed.

In medium term perspective, we changed our bias on the USD from positive to neutral as the case for sustained dollar gains supported by a relative outperformance of the US economy has been postponed ‘until further notice’. Throughout the month of August, the market momentum was EUR/USD negative due to global uncertainty/ risk aversion. This correction fizzled out recently and last week’s turn in global sentiment finally changed fortunes for EUR//USD cross rate. Global sentiment remains the key factor, but we also keep in mind that the ECB is apparently still a bit more focused on continuing its exit strategy than is the case for the Fed. This could lend EUR/USD some support, too (even as the currency market showed hardly any reaction to last week’s ECB press conference).

From a technical point of view, EUR/USD regained the 1.2732 resistance area (neckline H&S) and put in place a ST double bottom formation with neckline at 1.2780. Two weeks ago, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Last week’s price action improved the short-term picture in this pair. So, for now we don’t feel the need to change tactics at this stage. The first obvious resistance area is at 1.2923 (Mid august high). The targets of the short-term double bottom formation with neckline at 1.2780 area at 1.2935/72.