EUR/USD rebounds, but can it sustain higher levels?

On Monday, market talk focused on the victory of left-wing Syriza in the Greek parliamentary elections. However, the result had absolutely no negative impact on the euro. EUR/USD even rebounded well off the correction low (1.1098) to trade in the higher half of the 1.12 big figure during the US trading session. The ongoing risk-on sentiment also supported USD/JPY and, even more, EUR/JPY. USD/JPY returned north of 118.

This morning, most Asian equity markets join the risk on sentiment from Europe yesterday. Japanese equities outperform on the rise in USD/JPY and EUR/JPY.
Chinese stocks are again the exception to the rule. Poor December profitability data are to blame. USD/JPY and EUR/JPY are slightly off yesterday’s highs, trading respectively in the 118.20 and 133 area. The EUR/USD short squeeze also shifted into a lower gear. The pair stabilises in the 1.1240 area. After yesterday’s weakening, the PBOC set the yuan midpoint stronger. The yuan is trading slightly stronger from yesterday’s cycle low against the dollar.

Today, there are only few eco data in Europe. Markets will look for comments from the EU finance Meeting in Brussels this morning. There will be a lot of position talking after the Greek elections. However, we probably won’t get any concrete hints on how the negotiations between Greece and Europe will develop. As was illustrated yesterday, Greece is not a big issue for the euro at this stage and this might probably stay so for a while. So, the focus might turn the US today. There are plenty of eco data (see FI section) and markets will look forward to the outcome of tomorrow’s Fed decision. It is highly unlikely that all US eco data will point in the same direction. We expected decent new homes sales and a better Richmond Fed index, but weaker consumer confidence. So, no clear signal for the dollar going into the FOMC decision tomorrow. Currency traders might take a wait-and-see attitude after recent sharp swings. Sentiment on risk remains a wild card. US equities basically didn’t go anywhere of late. European markets live in some kind of euphoria. How long will this European feel good story continue? Will Russia again become a factor of importance for markets? If so, it might be a slightly negative for USD/JPY. The impact on the euro is less easy to predict. However, we still see no big upside for the single currency anyway on the near future.

In the wake of the ECB’s QE decision, our strategy was not to try to catch the failing knife in EUR/USD even as technical indicators pointed to heavily overbought conditions. We hold on to that view for now. A lot of investors are probably still wrong-footed by the speed of the recent decline. So the damage in case of an uptick should be limited. Yesterday’s euro rebound is no trend reversal yet. For USD/JPY we maintain a cautious bias. The ongoing downward pressure on yields in most industrialised countries may continue to cap the topside. In addition, at some point, Asian/Japanese equity markets might become nervous on the competitive declines/devaluations in the rest of the world. A risk-off correction for this or whatever other reason might bring the yen in the picture. EUR/JPY already cleared the EUR/JPY 134 support area and extensively tested the 131.22 support (Dec 2013 low + MT Neckline). The test is ongoing. The comparable range bottom in USD/JPY stands at 115.57. This level is still quite far away, but we keep an eye on it.

UK Q4 GDP in the spotlight

On Monday there were few eco data on the agenda in the UK. EUR/GBP followed a similar pattern as EUR/USD. The pair filled bids in the low 0.74 area this morning in Asia, but the global euro short-squeeze pushed the pair just north of 0.75 early in US dealings. BoE’s Kristin Forbes indicated that there were scenario’s which could imply inflation to rebound strong from its current declining trend. These scenarios would also imply an earlier increase in interest rates than currently expected. We didn’t see a big reaction of sterling. It might have slowed further potential losses of sterling against the euro and the dollar. Cable initially struggled to move away from the correction low but finally settled well north of the 1.50 barrier.

Today, sterling traders will look out for the first estimate of the UK Q4 GDP. A decent 0.6% Q/Q and 2.8% Y/Y is expected. The consensus is feasible, a positive surprise is not excluded. If so, the recent signals from the BOE that they are looking through the current low inflation might get more attention and support sterling. We have a positive intraday bias for sterling both against the euro and the dollar.