On Thursday, the Greek debt talks and the ECB meeting were the drivers for EUR/USD trading. Greece politicians reached a deal on a second rescue package while the ECB as expected left its policy unchanged. However, the euro failed to profit as the Greek political agreement was not rubber-stamped by Eurogroup Finance Ministers.
Yesterday, the EUR/USD cross rate moved up an down roughly between 1.3235 and 1.3325. Greece was still the dominant force behind the price action. The stop-andgo (or better go-and-stop) communication drove the swings in EUR/USD. Early in the session the single currency traded above the 1.3300 big figure as most investors considered a Greek deal as highly likely. However, German officials dented the hope that a solution would be reached at the Eurogroup meeting. It is an important lesson of the recent past not to ignore the signals from high-ranked German policymakers like Finance Minister Schaeuble. EUR/USD tumbled to the 1.3235 area around noon. The ECB as expected left its policy unchanged. ECB’s Draghi turned slightly less negative on the economy. During the press conference, ECB President Draghi confirmed that there was a political agreement on an austerity package in Greece. EUR/USD jumped higher and reached a minor now high at 1.3322 late in Europe. However, in the run up to the start of the Eurogroup meeting, it became clear the political agreement in Greece was no guarantee for an immediate approval of the new rescue package. Greece still had to ‘fine-tune’ its homework. So, the EUR/USD rebound slowed. EUR/USD closed the session at 1.3286, compared to 1.3260 on Wednesday. It was clearly a disappointment that a Greek deal was not finalized. However, the moderate decline of the euro suggests that the impact of Greece on EUR/USD trading is waning.
Today, the calendar in Europe is thin with only production and CPI data of the members states on the agenda. In the US, the trade balance and the Michigan consumer confidence will be published. In both cases we put the risk for a slightly weaker than expected figure. The data should only be of intra-day importance. The market talk today will still be on the delay of the new rescue package for Greece. As said, we have the impression that Greece is becoming less important for trading on global markets and thus also for EUR/USD trading. That said, the inability to remove the issue from the table has broken the positive momentum of the recent risk rally.
This might hamper further gains of the euro short-term. So, we expect a consolidation of the recent gains or even a very slight correction in the run-up the next meeting on Greece, expected on Wednesday.
Technical Picture. During the last quarter of 2011, EUR/USD was captured in a standing downtrend which lasted till mid January. The pair dropped below several important support levels, including the key 1.2867 area (Jan 2011 low). Mid January, the decline of the euro slowed. The euro downgrade of S&P caused EUR/USD to set a new reaction low at 1.2624, but a test of the 1.2588 didn’t occur. The decline in EUR/USD was exhausted and a technical rebound kicked in. The pair regained the 1.2858/79 area (Previous low/reaction high) and broke out of a downward trend channel. This indicated that the short-term pressure was easing. The pair got a boost from Fed decision and regained a series of key resistance levels (1.3077; 1.3146 and finally also the 1.3197 reaction high). The pair is now clearly above the 1.3146/1.3234 (LT neckline/reaction high) resistance (which was our stop-loss area). The short term picture improved further and suggests that there is room for the upward correction to be extended. The 1.3548 (02 Dec high) is the next target on the charts. In a day-to-day perspective, it looks difficult for EUR/USD to succeed a strong follow-through move higher.
On Thursday, the BoE raised the programme of asset purchases by £50 billion. This was in line with the consensus but sterling performed a temporary relief rally after the announcement. This rebound of sterling was very short-lived even as EU policymakers didn’t given the green light for a new Greek rescue package yet.
At the start of trading in Europe, it looked as if EUR/GBP would go for a test of the 0.8410/22 range top. The euro was supported by investor hope on a Greek debt agreement. At the same time, traders were cautions on sterling going into the BoE policy decision. However, a real test of the range top didn’t occur. Later during the session, uncertainty on the Greek debt deal resurfaced while UK eco data (trade balance and production data) were better than expected, too. EUR/GBP traded in the 0.8375/80 area at time of the publication of the BoE verdict. The BoE raised the bond buying program by £50 billion to £325B. While in line with the consensus, some investors were apparently positioned for the outside risk of a £75 billion rise.
The rejected test of the 0.8410/22 range top might have inspired profit taking on EUR/GBP longs, too. EUR/GBP dropped temporary to the 0.8336 area. The ECB left rates unchanged. A bit later, a rumour hit the screens that the Greek deal had been agreed. So, EUR/GBP reversed the post BoE losses. Remarkably, the pair held in the 0.8400 area, even as the EU leaders delayed the approval of the new aid package for Greece. We retain also that UK LT bond yields rose a few basis points after the BoE decision. However, it was no lasting help for the UK currency. EUR/GBP closed the session at 0.8400 compared to 0.8388 on Thursday.
Overnight, EUR/USD is losing ground, but for now EUR/GBP is decoupling from this move. Today, the UK PPI data will be published. A further decline might support the call of the BoE that inflation is declining sharply. However, it is too early to draw conclusions on any further steps of the BoE. So, the impact should be limited. The ongoing bickering on the Greek rescue package is no help of the single currency.
However, we have the impression that never-ending Greek drama is losing much of a power as a driver for trading on most markets. As EUR/GBP is nearing the 0.8410/22 range top, we keep a very close eye on the technical charts. Of late, sterling was hardly influenced by UK eco data or by soft BoE talk on QE. Nevertheless, we look out whether some repositioning now that the BoE meeting is out of the way, will be able to push EUR/GBP beyond the 0.8422 range top. A clear break won’t be easy as long as Greece is not off the agenda.
Global context. In December, the EUR/GBP cross rate joined the broader market repositioning out of the euro. Investors are well aware that the ECB will keep monetary policy extremely loose in the foreseeable future and that even further policy easing is still possible. The poor eco outlook and the unresolved debt crisis caused the euro to lose its advantage over the UK currency. We are no big supporters of the UK currency being a safe haven in case of market turbulence, but we couldn’t ignore the decent performance of the UK currency versus the euro.
Over the last three weeks, the decline was blocked .On the downside, the 0.8222 is holding up and several other key support levels are lining up (0.8142/0.8068). We assume that this support area will be difficult to break unless some high profile euro negative event occurs (e.g. in Greece). A sustained rebound above 0.8422 area (end December high) would improve the ST picture in this cross rate. However, for now this looks difficult too. So, range trading between 0.8222 and 0.8422 looks to be the name of the game, even as upside pressure is building.
