EUR/USD reverses brief dip on Greek debt agreement

On Friday, the euro finally felt some headwinds as investors became nervous in the last straight line to the key euro group meeting. Strong EMU PMi’s were ignored. EUR/USD dropped to the 1.1280 area. Sentiment improved again as the EMU finance misters reached an agreement on a framework for a four month extension of the Greek bailout. EUR/USD regained more than one big figure and closed the week at 1.1381 compared to 1.1368 on Thursday. USD/JPY succeeded a late-session a ‘risk-on rebound’, too.

Today, most other Asian markets show moderate gains, supported by the Greek debt deal. An adviser of Japanese Prime Minister Abe indicated that the yen is at a comfortable level and that the BOJ can hold off expanding stimulus for now. At the same time, a Reuters poll suggested that a big majority of Japanese firms sees no need for a further easing of monetary policy. USD/JPY is off the overnight highs in the 119.25 area and is changing hands near the 119 big figure. The euro is also off the highs reached after the Greek debt agreement on Friday. EUR/USD trades in the 1.1375 area at the moment of writing. Investors are apparently well aware that there is still a lot for work to do in the implementation of a workable Greek debt deal.

Today, IFO German Business confidence is expected to further rebound from 106.7 to 107.7. On Friday, strong EMU/German (services) PMI’s were completely ignored. if IFO confirms the strength, it might be a slightly positive for the euro. However, that the euro momentum is not very strong, even after the Greek debt deal. There are still several hurdles to be resolved. Will the proposition of the Greek measures today spark renewed market nervousness? At the same time, the focus for EUR/USD trading might turn more to the US. Today’ data will only be of intraday importance for USD trading. Markets will look forward for Yellen’s testimony before Congress on Tuesday and on Wednesday. The minutes suggest that the Fed Chairwomen won’t be really hawkish. If markets, position for such a message, no strong momentum for the dollar is expected.

The euro (EUR/USD) rebounded after the Greek debt agreement, but the gains are very moderate. The EUR/USD pair is still blocked in very narrow sideways range and we don’t see a trigger for a real directional move ahead of Yellen’s testimony tomorrow. If Yellen isn’t too soft, the topside should remain rather difficult. USD/JPY shows a similar short-term consolidation pattern. The internal debate on the potential negative side-effects of the weak yen suggests that any further sustained upside in USD/JPY is difficult.

From a technical point of view, the 1.1534 (ST reaction high)/1.1679 (reaction top) remains our first topside reference. We still expect that a sustained break will be difficult even if the Greek debt drama moves to the background. On the downside, important support levels come in at 1.1262/24 and 1.1098 (correction low). For these levels to be broken short-term, a flaring up of the Greek crisis or a substantial rise in US bond yields is needed. Recently, US data showed a loss of momentum and were not strong enough to initiate a new up-leg of the dollar. The Fed minutes were soft but the correction in US bond yields and in the dollar were very limited. We maintain a EUR/USD sell-on-upticks approach longer term, but are in no hurry to jump in at the current levels. USD/JPY tried to regain the 120 barrier after the US payrolls. However, the key 120.83/121.85 topside resistance stayed out of reach. The yen even regained ground on rumours of an internal debate within the BOJ on the efficacy of more easing. The pair holds well within the 115.57/121.85 trading range. We expect the range to hold for now. A sell-on-upticks approach is slightly preferred.

Sterling losing limited ground after retail sales

On Friday, UK January retail sales declined more than expected. EUR/GBP rebounded temporary after setting a new minor correction low at 0.7340 early in European dealings. The rebound was contained given the miss in the retail sales and the recent rally of sterling. Later in the session, EUR/GBP came again under pressure on overall euro weakness on Greece, but this move was also undone as EMU finance Minsters reached an agreement on Greece. EUR/GBP closed the session at 0.7390, compared with 0.7374 on Thursday. Cable was slightly lower on a daily basis too.

Today, the CBI reported sales will be published. Markets usually react more to the ONS retail sales rather than the CBI report. A limited setback from multi-year highs at the end of last year is expected (35 from 39). In line with the price action after the publication of the ONS retail sales, we think that a big negative surprise is needed for this report to undermine the sterling constructive sentiment. We maintain a sell-on-up-ticks strategy for EUR/GBP, but a sharp break lower is not evident short-term as the Greek tensions ease and after the recent rally of sterling.