Lower Asian and European equity markets overnight triggered a break in the Euro early in the session, but stable U.S. stock markets helped to hold it in a range for most of the New York session.
Without any major economic reports to push the markets around, traders have decided to focus on two elements: the start of U.S. earnings season and the European bank stress test results.
U.S. earnings season begins after the equity market closes this afternoon. Since the Euro has been taking its cue from equity markets lately, traders expect today’s first report from Alcoa to move the market.
European stress test results are not due until July 23rd, but that hasn’t stopped traders from expressing concerns about the event. Traders continue to question the toughness and transparency of the report. There is also confusion as to how much information will be revealed and if the publication of the results will be limited to only large banks.
The question of ordering banks to recapitalize came up late last week when European Central Bank President Trichet mentioned in a speech that it may be necessary.
Technically, the EUR USD confirmed last week’s daily closing price reversal top at 1.2722. This pattern usually suggests a 2 to 3 day break coupled with a 50% to 61.8% correction. This would make 1.2436 to 1.2369 the next likely downside target.
Besides the cautious approach by investors ahead of the Alcoa earnings report after the close, U.S. markets reacted to the sell-off in the Japanese stock market. Japanese equities broke after the nation’s ruling party lost more seats than expected in Sunday’s upper-house elections.
This new round of political uncertainty could mean more economic woes for the country. Traders are worried that a drop in equity prices could increase the chance of a double-dip recession. In addition, some investors feel that the economy will be threatened by the possibility of deflation once government stimulus fades and if global demand declines.
The USD JPY was under pressure most of the night as traders interpreted the news as bearish for the currency. Early last week the Dollar/Yen posted a daily closing price reversal bottom. This bottom was confirmed by a subsequent three-day rally. Although the chart indicates there is room to the upside with 90.97 a potential upside target, traders should be aware of a possible short-term correction back to 88.06 before moving higher.
Over the next two weeks earnings reports should be the key market driver until the European stress tests are released. This means that the Euro is likely to take direction from the U.S. equity markets. Robust earnings should drive stock prices higher and along with that, appetite for higher yielding assets. Commodity-linked currencies should also see greater demand if U.S. stocks can breakout to the upside. Conversely, worse than expected earnings results should trigger an equity market break taking the Euro and higher yielding currencies with it. Lower demand for risky assets could be beneficial for the Yen despite the recent political change.
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