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Tuesday, Asian markets are mostly slightly lower, but still no clear trend. For now, this is a market looking for new guidance after last week’s strong trend. The EUR/USD is changing hands in the 1.31 area.
Yesterday, investors in several markets were looking for a new equilibrium as the first post-Fed reaction was out of the way. European equities, the Bund and the EUR/USD showed some intraday volatility, but at the end of the day the changes limited.
For the EUR/USD there was not really one dominant story to guide the price action. EUR/USD ceded some ground (profit taking) during the morning session in Europe. There was the usual market chatter on the EMU crisis management. The reluctance of Spain to apply for ESM support was often mentioned as a negative factor for EMU assets. However, wasn’t this reluctance already there last week when the post-Draghi/Fed rally was powering ahead?
German Chancellor Angela Merkel gave her annual press conference yesterday where she addressed the future of the Eurozone and made the unlikely claim that her "heart bleeds" for the suffering in Greece. Merkel urged European leaders to join together in order to increase political coordination across the region and stated that peripheral states must continue with the harrowing task of economic reform to help balance the Eurozone economy.
The Chancellor, dubbed the 'Iron Lady of Europe' by some, stressed her desire for Greece to remain in the currency bloc as long as the Hellenic nation sticks to its fiscal consolidation targets. Regarding the situation in Italy, Merkel did not mention anything to do with the ESM or the ECB's bond-buying scheme, nor did she sympathize with the people of Italy with such visceral language as she deemed appropriate for the Greeks. Merkel also spoke of the European Central Bank, and the disgruntled Bundesbank Chief Jens Weidmann; she said that Weidmann's opposition came as a result of his honorable desire to solve the crisis in a sustainable way.
EUR/USD drifted lower during the morning trade in Europe, on limited profit taking after last week’s strong rally. Even so, the first ‘setback’ attracted very soon new buying interest.
The Empire State manufacturing survey was materially weaker than expected. Usually this is not the most important data series. However, in a context where markets are desperately looking for guidance in a new area, it was enough to kick-start a new USD selling wave. The pair tested Friday’s top and even reached a minor new top at 1.3172, but there were no follow-through gains.
This morning rumors had the EUR moving higher. The economic sentiment improved from -25.5 to -18.2 (consensus of -19.0), but current situation is much weaker, from 18.2 to 12.6 (consensus of 17.7). The ZEW survey points out a big change in EMU's economic sentiment, rising from -21.2 to -3.8 in September. The EUR/USD is now falling again, towards its daily lows as we move to the US session where the calendar gets somewhat interesting.
In the US, the Q2 current account, the TIC data and the NAHB housing market index are scheduled for release. The first one is old news and the second one seldom has a lasting impact on currency trading. The NAHB housing market index might be interesting but market moving potential is limited too. Markets will also keep an eye on the first comments from Fed policy makers after last week’s Fed action.
Today, Dudley and Evans will give their view. Both are on the dovish side of the spectrum. A reaction, if any, most probably won’t be supportive for the dollar. In a global perspective, some consolidation on the recent risk-on gains might be on the cards. For now, the tension in the Middle East and between China and Japan has only a limited impact on global market sentiment. However, they are also no support for sentiment on risk. In EUR/USD no important technical levels are hit. For now, we assume more short-term consolidation, with the risk slightly to the downside.