EUR/USD short-squeeze to continue

On Tuesday, markets traded more volatile. The euro short squeeze continued even as sentiment on risk deteriorated. The dollar came under further pressure as several US bellwethers reported disappointing results. An awful US durable orders report reinforced the pain for the dollar. USD/JPY dropped to the lower half of the 117 big figure. EUR/USD traded temporary north of 1.14.Late in the session, strong results from Apple eased the risk-off trade and gave the US dollar some breathing space.

The rebound of US equities after-market closure prevented sustained weakness in Asia. In Singapore, the Monetary Authority (MAS) unexpectedly eased monetary policy by lowering the band in which it allow the Singapore dollar to appreciate against a basket of currencies. The MAS uses the currency as its major policy tool. The ‘fear’ that other Asian currencies might consider further easing weighs on regional currencies like the won and supports regional equities. The Nikkei trades in positive territory despite yesterday’s correction in the US. USD/JPY rebounded north of 118. EUR/JPY is holding near yesterday’s highs close to 134. The short-squeeze of EUR/USD is losing momentum, trading in the 1.1370 area. The core CPI in Australia was slightly higher than expected. Investors scale back rate cut expectations. AUD /USD returns north of 0.80.

Today, there are no important data in the US or Europe, but that didn’t prevent a rise in volatility during the European morning trade yesterday in similar circumstances. Greek politics has become less dominant, but several developments including the nomination of an anti-EMU finance Minister suggest that hope on a ‘easy’ compromise with the Troika was maybe a bit optimistic. Will European (equity) markets hold there calm despite the aggressive Greek positioning? The Jury is still out and its impact on the euro is even less clear. Yesterday, EUR/USD was squeezed higher as the risk-off sentiment was fuelled by negative US news. How will the euro react if the source of uncertainty comes from Greece or maybe from Russia. We maintain the view that a sustained euro rally will be difficult if uncertainty comes from the Euro zone and as the ECB QE money printing still has to start. So, we continue to look out for indications that the post-ECB EUR/USD short-squeeze slows.

Of course, the communiqué after the Fed policy decision will be the key factor for global markets trading today. For an in depth analysis see the fixed income part of this report. We expect the Fed to hold course and make few amendments to its previous assessment. This should be mildly positive for the dollar. However, In the wake of the ECB’s QE decision, we maintain the view not to row against the LT negative EUR/USD trend. A lot of investors are probably still wrong-footed by the speed of the recent decline. So the damage in case of an uptick/short-squeeze should be limited. This week’s euro rebound is no trend reversal yet. For USD/ JPY we maintain a cautious bias. The ongoing downward pressure on core USD/ EUR yields may continue to cap the topside. In addition, at some point, Asian/ Japanese equities might become nervous on the ‘competitive’ devaluations the likes of the EMU. A risk-off correction 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). Admittedly, the tension eased yesterday. 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 GDP failed to give clear guidance for sterling

Early on Tuesday, EUR/GBP price swings were initially driven by the euro side of the story, even as UK markets prepared for the Q4 GDP data. The euro shortsqueeze continued and propelled EUR/GBP back to the 0.75 area. The report was slightly below the consensus at 0.5% Q/Q and 2.7% Y/Y, but the loss for sterling was very limited. The details of the report were still OK with services still taking the lead of the recovery. Later in the session, sterling rebounded as the dollar came under pressure. Cable even rebounded to the 1.52 area. For EUR/GBP the picture was ambiguous, with the pair trading in the 0.7480 area.

Today, there are no important eco data on the agenda in the UK. Carney will speak in Dublin, but we don’t expect him to break new ground. So, sterling trading will probably remain at the mercy of global factors and technical considerations. We look for a topping out pattern in EUR/USD before also considering new/ additional EUR/GBP short exposure.