On Tuesday, the rally of EUR/USD shifted into a lower gear. EUR/USD still reached a new short-term high in the 1.4250 area during the morning trade in Europe. Recent comments from the ECB cemented market expectations that the bank wont back away from its intention to raise rates at the April meeting and this continued to support the euro. However, from there the focus of EUR/USD traders turned to the situation in Portugal and Ireland. In Portugal, it looks that there is a decent chance the governments austerity measures wont get the approval from parliamentary majority today. If so, this might be the end for the minority government and would raise the chance that Portugal will have to ask for assistance to cover its financing needs. At the same time, there were also rumours that an Irish bank would miss an coupon payment. However, there was no hard evidence on this issue. Going into this weeks EU summit, there was also a lot of market chatter and an FT article that Finland might not agree to take up its share to boost the lending capacity of the EFSF. Most of these issue were not new, but in the wake of the recent rally and with the EU summit coming closer, they were enough a reason for some short-players to lock in profits on the recent rally. EUR/USD dropped to the 1.4180 area and closed the session at 1.4196, slightly lower from the 1.4226 close on Monday evening. However, in a broader perspective, yesterdays move was nothing more than a limited correction in a well-established uptrend. Uncertainty on the situation in Libya and on the nuclear problems in Japan continued to linger, but had only a very limited impact on currency trading.

Today, the calendar of eco data is again only moderately interesting. The US new homes sales are only of intraday importance for currency trading, at best. The same applies to the EMU industrial orders and EU consumer confidence. The focus of the European markets will be on the budget vote in Portugal. Investors will also look for-ward to the EU summit tomorrow and on Friday. With respect to Portugal, there is a decent chance that the government will step down. This doesnt automatically cause the country to look for a bail-out, but it will make the financing situation of Portugal difficult, to say the least. In a broader perspective, Portugal asking for assistance at some point should not really come as a surprise. However, in a day-to-day perspective it might weigh on sentiment. It is also possible that short-term players may continue to move to a more neutral position going into the EU summit. This might slow the rally of the euro, especially if global sentiment on risk would become less constructive, too. In a day-to-day perspective, there might room for some consolidation or even for some further profit taking on the recent rally. However, for now the global picture hasnt changed in a profound way.

Looking at the broader picture, EUR/USD moved north of the 1.3962 previous high after the ECB signaled that it will probably raise interest rates as soon as next month. This brought the 1.4282 November 2010 high again in the picture. EUR/USD set a corrective low at 1.3752 two weeks ago, but the picture remained EUR/USD con-structive. After the positive result of the EMU summit last week, the 1.3750 area provided decent support short-term. The 1.4036 previous year was broken at the end of last week. The 1.4282 November high came within striking distance, but a real test didnt occur. Of late we indicated that we were not convinced that a move beyond this area will be sustainable over time. In a short-term perspective, we dont draw a conclusion from yesterdays „correction yet. The broader picture remains EUR/USD constructive. A drop below the 1.4036/12 area (Previous high/MTMA) would be a first indication that the rally is losing momentum. Partial stop-loss/profit protection on EUR/USD long might still be considered as the pair is heavily overbought.

EURUSD

On Tuesday, USD/JPY was a spot of relative calm in the currency universe. The pressure from repatriation flows was still counterbalanced by the fear for additional action from the BOJ (with or without the support from other G7 central banks). So, EUR/USD was locked in a narrow range around the 81.00 big figure. However, we had the feeling that the topside in the pair was still very difficult without any additional external help. USD/JPY closed the session at 80.97 compared to 81.03 on Monday evening.

This morning, Japanese shares fell prey of a correction after yesterdays rally. Other Asian markets were mostly slightly higher this morning. However, in the current environment we doubt that this will be a big support for yen cross rates (USD/JPY). For now, we hold on to the view that CB action might slow the rise of the yen, but another trigger is probably needed to cause real yen weakness. This remains a tactical game between the Japanese authorities (with some backing from the G7) and the market. We stay sidelined for now.

On Tuesday, the focus of EUR/GBP traders shifted from the euro side of the story to the UK. The euro rally slowed overall, but the UK inflation data were also a key factor for sterling trading. Consumer prices in the UK rose from 4.0% Y/Y to 4.4% in Febru-ary (the market consensus was for an already high 4.2%). The retail prices index even came out at 5.5% Y/Y. So, UK inflation continues to move further away from the BoE inflation target. The stubbornly high inflation is becoming a growing source of concern within the BoE and yesterdays data again caused markets to question whether the BoE could stay sidelined without hurting its credibility. So, the debate on a May rate hike is again on the table and this supported sterling. EUR/GBP slipped below the 0.8700 handle after the publication of the inflation data. At the same time, the monthly budget data came out at a higher deficit than expected. The direct impact on monetary policy is less obvious, but a higher budget deficit, ceteris paribus, in theory calls for a less accommodative monetary policy, too. At noon, currency traders received another reason to scale back sterling shorts as the CBI industrial trends orders came out much stronger than expected. EUR/GBP reached an intraday low in the 0.8660 area early in US dealings. At around that time, there were some headlines on the screens from BoEs Sentance. He said that BoE has to take its responsibility on inflation now and that inflation could easily exceed 5% later in 2011. Of course, his harsh tone on inflation should be a surprise for markets. Later in the session the rise of sterling slowed. The pair closed to session at 0.8675 com-pared to 0.8722 on Monday.

Today, the eco calendar contains the BBA loans for house purchases. This is no market mover. However, markets will keep a close eye at the minutes of the previous BoE meeting, to see whether some of the members who voted for an unchanged decision are moving closer to change their assessment in favour of a rate hike. Later in the session, UK Chancellor of the Exchequer Osborne will announce the budget for 2001. The government is like to confirm its ambitions to cut the deficit, but the risk of lower growth might raise questions whether the targets will be met. From a currency point of view, the budget should be seen as neutral to potentially slightly negative for sterling.

Since early January, the pair moved up and down within a range of 0.8285 and 0.8672. In the February inflation report, the BoE saw rising upside inflation risks, but BoE governor King was less committed to a rate hike than a lot of investors had anticipated. So, there was a window of opportunity to take profit on sterling long positions. EUR/GBP moved gradually away from the February lows and the ECB talk at the March meeting propelled EUR/GBP beyond the 0.8500/29 resistance. This improved the short-term picture in this cross rate. The pair also rose beyond the 0.8672 level (previous 2011 high), but this break is question after yesterdays correction. The overall picture is still EUR/GBP constructive, but we have the impression that the short-term momentum is waning. So, at least partial profit taking/stop-protection in EUR/GBP longs might be considered short-term. A sustained drop below the 0.8672/56 (Previous top/MTMA) area might be an indication that the correction has some further to go.

EURGBP