Sentiment turned "'risk off" in the American afternoon Thursday, and markets are likely to see a contraction in risk appetite during the upcoming Asian session. The Euro and the Sterling have collapsed from their high levels with the EUR/USD losing the 1.3100 mark and the GBP/USD falling more than 100 pips to trade below 1.6050.
The USD is broadly stronger as traders prefer the safe harbor of the greenback. JPY, another safe haven, is stronger against its major trading counterparts as well. The USD/JPY ended off its daily highs in the late run to safety, but still gained ground for a sixth straight day, adding around 30 pips to close at 79.25.
U.S. equities ended lower, inspired by the news of the day that Google unexpectedly reported negative earnings and expenses, which also weighed on currency "risk on" plays.
Kathy Lien from BK doubts about the nature of the USD rally. "The big question in the forex market today was whether the rally in the U.S. dollar was driven by risk aversion or stronger data," asks Lien. "The fact that the dollar strengthened against all major currencies including the Japanese Yen and Swiss Franc suggests that this is a story about the greenback but if investors were truly encouraged by the latest economic reports, U.S. stocks would not have fallen as much as they did today."
The Dow Jones Industrial Average lost 8.06 points to end at 13,548.94. The S&P 500 index slid 3.57 points to 1,457.34. The Nasdaq Composite dipped 31.25 points to 3,072.87. Google recorded its largest single-day decline since January, having lost 8%.
Lien points in a recent article that high beta currencies "were trading sharply higher during the early European trading session but gave up all of their gains and then some during the U.S. hours." It could be explained as stocks were pressured on Google and Wall Street began to fall before risky currencies, then the USD strength coming from stocks drilled EUR and GBP that found stops losses just below its previous lows.
EUR/USD ahead of Friday's Summit resolutions
As for Friday's session, the EU Summit carries headline risk and potential bombs later this afternoon and tomorrow. Even though no key decisions are expected at this gathering, market participants will be watching carefully for headlines about Spain and Greece. Low expectations are potentially weighing even more on sentiment and tight ranges in Forex can be expected.
Following a consolidation stage around 1.3100, EUR/USD came under mild pressure during the American afternoon as market sentiment was hurt by Google missing earning expectations. The latest move down also came amid headlines that the Greek PM is asking the EU to release the full €31.5 billion tranche of aid as soon as possible. The EUR/USD is closing Thursday around 1.3065.
According the Wells Fargo, the EUR/USD near-term bias has turned essentially neutral. "Today's most important developments were encouraging overall, including hints of a pickup in Chinese economic activity and suggestions that the Bank of Japan could ease its monetary policy stance further," Wells Fargo team says. "Low expectations surrounding the European Leaders summit that begins today is potentially weighing on sentiment."
"After many foreign currencies enjoyed gains during the early part of this week, today's price action is perhaps indicative of some consolidation as the week comes to a close," they comment. "Our near-term bias for the euro and other foreign currencies has turned from mildly bullish to essentially neutral."
Commerzbank analysts note that "the potential for disappointment tonight may be limited as long as there are no headlines dampening the expectation of an imminent Spanish request for bailout funds or aid payments to Greece. The first support in EUR-USD is located around 1.3000/1.3025 while yesterday's high at 1.3140 will have to be breached on the topside."
Finally, according to the TD Securities team, "It is also worth pointing out that risk reversals have climbed to significant new levels as well recently-currently trading near mid 2010 levels - raising the risk of a further squeeze higher in the EUR."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.