• Home ::
• Fundamental ::
• Market View ::
• Sunrise Market Commentary: Currencies

• Send
• Print
• Add To
• Rss

Sunrise Market Commentary: Currencies

4a1e8203-7e10-4709-baf2-f1d41984499d

0

0

EUR/GBP at new life−time highs

Mon, Mar 31 2008, 07:27 GMT
by KBC Market Research Desk

KBC Bank

On Friday, EUR/USD basically developed a sideways trading pattern. The pair continued to trade in the high 1.57/low 1.58 area and in this respect the single currency easily maintained the gains booked earlier last week. The higher than expected regional EU CPI data only reinforced market feeling that the ECB has not much room to ease monetary conditions any time soon and this continues to support the euro. Early in US trading, the dollar tried to regain some ground, but these gains were not really convincing and EUR/USD closed the week in the 1.58 area, still a decent gain compared to the 1.5433 close one week earlier.

Today, the US eco calendar contains the Chicago PMI. In Europe, markets will look out for the CPI estimate, the M3 data and the euro zone confidence indicators. The Chicago PMI is expected to show a moderate rebound from last month’s steep fall, but this probably won’t be enough to change the markets’ view on the fate of the US economy going forward (and thus no support for the dollar). Regarding the European inflation data, the risks are obviously on the upside and if confirmed the ECB will have no choice and will be forced to maintain their rather hawkish stance of late. With respect to the EU confidence data, it will be interesting to see whether they can confirm the resilience that was seen in some other regional indicators recently. A high CPI reading and to a lesser extent decent EU confidence data probably won’t be a major surprise for markets anymore. However, they remain a supportive factor for the single currency.

Further out this week, the attention in all markets will go out to the early month data (ISM/Payrolls) in the US and a key speech of Mr. Bernanke on the economy. We come back on that later, but we doubt they will already yield the positive surprises to give the dollar any lasting support.

We have a long-term negative view on the dollar, as we expect the fallout of the credit- and housing crisis will continue to affect the US economy in the quarters to come. After a brisk rebound early last week, the EUR/USD rebound shifted into a lower gear in the second half of the week, but after all the dollar was also not able to make any rebound worth mentioning. The 1.5904 reaction high and the psychological level of 1.60 probably are tough resistance levels, but the fact the dollar wasn’t able to regain any ground on the recent EUR/USD comeback suggests that a test of these high profile levels still might be in the making if the data (US and Europe) were to point in that direction.

The short term technical picture remains euro bullish as long as above 1.5648 (MTMA). An eventual deeper retracement toward the 1.54/1.5340 area would give good euro entry levels for medium term players.

USD/JPY showed some intraday swings on Friday, but in a long term perspective the pair the pair still holds to the sideways trading pattern that is already in place for more than a week. The dollar trended cautiously higher against the yen early on Friday, but the gains could not be sustained and USD/JPY then drifted gradually lower going into the close. The price erosion on the US stock markets in this respect might have played a role, even if the link between stocks and the yen recently was not that close anymore.

This morning, USD/JPY again trades rather volatile (Higher at the start of trading but already off the highs at moment of writing). End of quarter/fiscal year position squaring probably is a big part of the explanation for these swings. The Japanese eco data this morning were mixed with industrial production better than expected and the housing starts weaker than expected. The Nikkei (and some other Asian stock markets) experience a difficult start of the new trading week, but the immediate impact on USD/JPY trading is again not really evident. Japanese investors already prepare for the important Tankan report scheduled for release tomorrow morning.

USD/JPY made a pre-Easter rebound which was extended to the obvious resistance at 101.40 (previous low), but it held and USD/JPY slid lower again. However, while EUR/USD is again close to the highs USD/JPY is still almost 4 yen from the lows. So, the least one can say is that the yen has no strong momentum. Nevertheless, in line with our overall USD-negative bias we continue to see downside potential for USD/JPY as well as long as the USD/JPY pair remains below 101.40 for a re-test of the cycle lows at 95.77.

Looking at the graphs, the longer term picture for USD/JPY is still very much downwardly oriented and the sustained break below the 1999 low only confirms this LT picture.

During most of last week, sentiment was already very sterling sceptic and this feeling was only reinforced after a series of poor data (consumer confidence/ Housing data) published before the start of trading Friday morning. Those data set the tone for trading also later in the session and EUR/GBP set new life-time highs at around 0.7929. There was a very small (EUR/USD inspired correction) at the start of US trading, but the sterling remained under pressure and closed the week close to the life-time highs and trades still in that area this morning as the pair already set a new (minor) high at 0.7932.

Today, the UK eco calendar is almost empty. So, the focus for EUR/GBP trading will be on the global market developments.

Recently, the sterling sentiment was very downbeat and corrections, if any, were very limited and short-lived. Fundamentals (housing, economic growth, overextended consumer and the problems of the City) clearly support the weakening of sterling. So, we hold on to our long-term negative view for sterling. Even short-term, the risks for EUR/GBP remain clearly to the upside and the as the pair brake above the 0.7910 area, a test of the psychological level of 0.80 might be in the cards.

• Download Full Sunrise Market Commentary Currencies

Published on  Mon, Mar 31 2008, 07:33 GMT