On Friday, EUR/USD showed again some remarkable price action. After a ‘suspicious’ up-tick on Tuesday, the pair held close to the 1.37 area ahead of the US payrolls report as investors feared more bad news from the US labour market. The US payrolls report indeed painted a poor picture as more than 500K jobs were lost. However many investors apparently had feared an even bigger loss and markets first didn’t know what conclusion to draw from the report. The market reaction to the report was not consistent through different markets. Equity investors were not really convinced and stocks headed south and investors continued to buy save haven bonds. Currency traders did draw a different conclusion: EUR/USD tried to gain some ground immediately after the release, but the move failed and this pulled the trigger for a euro correction. So, for EUR/USD there was some kind of ‘buy the rumour, sell the fact’ reaction after the payrolls. We are a bit puzzled whether we should call this a dollar rebound as USD/JPY moved lower at the same time. Nevertheless, EUR/USD continued to cede ground throughout the remainder of the session and closed the day at 1.3476, compared to 1.3702 on Tuesday’s evening.

Today, calendar is almost empty on both sides of the Atlantic. However, this will for sure change later this week with a lot of important US eco data to be published from tomorrow on. In Europe, all eyes will be on the ECB interest rate decision on Thursday.
Since the start of the new year, we indicated that currency traders didn’t find a straightforward new trading theme yet and this was again illustrated on Friday. Should the dollar got the advantage of the doubt on the expectation that the US economy will emerge from the crisis first, supported by hefty stimulus measures? Or will the dollar suffer from the flood of liquidity and extremely low interest rates as the Fed’s shifts towards quantitative easing? Of course, within the EUR/USD balance, there is also the euro side of the story. European data are becoming awful, too. The ECB is (very) reluctant to bring interest rates to extremely low levels (or even more to make steps towards quantitative easing). This gives the euro interest rates support over the dollar, but markets obviously doubt on the adequacy of the ECB policy, too. Ahead of the ECB interest rate decision on Thursday, uncertainty on what to expect from the ECB might cause some additional euro nervousness, too. Longerterm we remain dollar skeptic, but in the current context of high market indecisiveness, we can’t but keeping a close eye on the technical chart.
From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern and an important downtrend line (cf. graph). This made the MT picture for EUR/USD positive. However, the rebound lost momentum in the second half of December and in a forceful correction, EUR/USD dropped last week to the top of the previous sideways range (1.3300 area). This level held but the subsequent EUR/USD rebound had no strong legs either. At the end of last week, we suggested that the pair might had entered a short-term consolidation pattern between 1.3300 (reaction low + previous range top) and the 1.3825 area (previous low). This range is still in place, but the EUR/USD price action on Friday was far from convincing. For now, we hold on to our ST buy-on-dips approach. However, tight stop-loss protection remains warranted if the pair was to clear the area 1.3300 area.
On Friday, USD/JPY was under slight downward pressure ahead of the US payrolls report. The pair tried to gain ground immediately after the release of the report. However, the gains could not be sustained as a disappointing open on the US stock markets brought the yen again in the picture. USD/JPY declined from intraday highs in the 91.60 area and closed the session at 90.39.
This morning, Japanese (stock) markets are closed. Most other Asian markets show losses in line with the US stock markets on Friday evening.
Looking at the charts, global market stress and overall dollar weakness in the wake of the US Fed’s announcement on quantitative monetary easing hammered USD/JPY and the pair set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters. USD/JPY first settled in a sideways trading pattern close to the 90 mark and tried to move higher during the first trading days of 2009, supported by the ‘improvement’ in stock market sentiment. The pair tested a first resistance area around 94. The level was temporary broken, but the test was rejected. The long-term trend in the pair remains negative. In a day-to-day approach we continue to prefer a sell-on-upticks approach. A break above the 94.63 reaction high would question our ST negative bias. The downtrend might slow below 0.9000 as officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8720 reaction low.

On Friday, the rebound of sterling against the euro continued. At the start of the session, EUR/GBP tried to move higher, but the move lacked power. The UK production data painted a very bleak picture on the UK economy, but that was not enough a reason to cap the rebound of the UK currency. The move even accelerated later in the session as overall pressure on the single currency left its trace on EUR/GBP, too. EUR/GBP continued to lose ground throughout most of the day and closed the session at 0.8878, compared to 0.9006 on Thursday.

Over the weekend, the NIESR GDP estimate for December declined from an estimated contraction of 1.1% to -1.5% in the three months through December. Today the UK calendar is empty.

At the start of 2009, the pressure on sterling eased and this trading pattern was extended after Thursday’s BoE interest rate decision. On top of that, on Friday, the price action in EUR/GBP mirrored not only correction/rebound in sterling, but also overall euro weakness. This theme could continue to play its role ahead of Thursday’s ECB interest rate decision and press conference. Nevertheless, we maintain our LT view that a negative interest rate differential vis-à-vis the euro, combined with ongoing negative eco news contains the risk for sterling to come under pressure again. We remain sterling skeptic as long as we don’t receive a sign that the weakness of sterling gets more weight in the BoE’s monetary policy assessment and/or unless we get a clear sign on the technical charts.

On the technical charts, the break above a series of high profile resistance levels in November/December has made the long term technical picture outright positive for EUR/GBP. Since start of 2009, EUR/GBP showed quite a forceful correction but in our view this move still didn’t change the long-term sterling negative picture yet. The drop below the 0.9000 suggests that the correction might have some further to go. Nevertheless, we still consider the current move as corrective in nature Long term, we still look to buy EUR/GBP but we’re not in a hurry and wait to see how far the current correction has to go. A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude.