On Wednesday, the euro continued to cede ground against the dollar. Recently, investors already turned ever more euro skeptic and yesterday’s financial headlines didn’t provide any good reason to change tactics, even as situation in the US is far from brilliant, too. The 1.3% German GDP estimate implied a very poor Q4 growth figure and European industrial production showed a 7.7% Y/Y decline in November. These headlines were no support for the single currency. However, concerns on the credit quality of the European governments were again the main driver for EUR/USD trading. Around noon, there appeared some headlines/rumours that Ireland might look for IMF support. The news was firmly denied by the Irish authorities and the IMF. However, the story perfectly illustrates the market sensitivity to this issue. Later in the session, the rating of Greece was downgraded one notch by rating agency S&P. At that time EUR/USD already failed to gain on a very weak US retail sales report, published a few minutes before Greece’s downgrade. EUR/USD dropped to the 1.31 area immediately after the rating downgrade. There was no aggressive follow through selling but the euro remained in the defensive for the remainder of the session and closed at 1.3125, compared to 1.3182 on Tuesday. The steep losses on the US stock markets at that time caused no additional euro losses. So, while the dollar is preferred over the single currency, investors don’t fully play the USD safe haven card either.
Today, the calendar contains the US PPI, the jobless claims, the Empire manufacturing and the Philadelphia Fed survey. These data will contain valuable information on the US economy. However, the ECB interest rate decision and the Press conference at 14.30 will be the highlights for markets today. Aside from the ECB interest rate decision, the earnings’ season will come to the forefront and the global market reaction to the first high profile results (JP Morgan, Intel) might also have consequences for currency trading.
At the start of the new year, currency traders didn’t immediately find a straightforward new trading theme. There is still a lot of uncertainty on the US economy and on the consequences of the quantitative easing. However, the market gradually inclined to give more weight to the negative news coming from the euro zone. The deterioration of the European government finances has become an ever more important factor for EUR/USD trading. For today, the market reaction to the ECB interest rate decision will be interesting. In the current euro skeptic sentiment, one can raise the question whether the ECB can do any good for the euro. A cut might be considered as the ECB admitting the sharp deterioration of the European eco situation; an unchanged decision will most probably cause market headlines on ECB being behind the curve. In a longer term perspective, we don’t see a more gradual ECB approach as intrinsically euro negative. However, this is obviously not the way the market is currently thinking about this subject.
To conclude: the market has been euro skeptic recently and for now there is no obviously trigger available to change this ST sentiment. Additional negative credit headlines on European governments (Spain downgrade?) or less successful government bond auctions (if they would occur) might even reinforce the euro skeptic market attitude. Longer-term we continue to have doubts on the chances for a protracted dollar rebound.
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 below the top of the previous sideways range (1.3300 area). This removes the MT Euro positive bias and makes the picture neutral to negative short-term. So, in a day-to-day perspective, there is no reason to row against the EUR/USD negative tide.
On Wednesday, USD/JPY set an intraday high just below the 90.00 mark at the start of trading in Europe. The pair turned south inspired by the global negative economic and financial headlines. The poor US retail sales, the Greece downgrade and the US stock market losses made the pair setting an intraday low in the 88.60/65. However, given the flow of high profile negative headlines and renewed investor risk aversion, the yen performance was far from spectacular. USD/JPY closed the session at 89.05, not that much different from the 89.38 close on Tuesday.
This morning, Japanese machine orders showed an unprecedented 16.2% decline in for November. Japanese equity markets (-4.92%) joined the steep decline in the US and in most other Asian markets.
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. 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. We continue to prefer a sell-on-upticks approach. However, the downtrend might slow below 0.9000 as Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8715 reaction low. ST players may even consider partial profit taking in case of return action towards the 2008 low and look the reinstall the position in case of a USD/JPY rebound (e.g. if stocks would enter calmer waters again).
On Wednesday, EUR/GBP showed some wild intra-day swings. However, after the sterling losses earlier this week, this time the euro negative sentiment/headlines prevailed. The pair set an intraday high above 0.91 during the morning session in Europe but from then the euro selling also affected EUIR/GBP trading and the pair reached an intraday low in early US trading (more or less in line with EUR/USD, after the Greece downgrade). UK measures to facilitate lending to UK companies had visible impact on Sterling trading. EUR/GBP closed the session at 0.9030, compared to 0.9092 on Tuesday.
Today the UK eco calendar is again empty. So, sterling trading will be at the mercy of global market sentiment.
At the start of 2009, pressure on sterling eased and this trading pattern was even extended after Thursday’s BoE interest rate decision. On top of that, Euro skepticism also weighed on EUR/GBP. However, the price action this week illustrated that sterling sentiment remains fragile, too. Sentiment could remain EUR-skeptic ahead of today’s ECB interest rate decision and press conference. Nevertheless, we hold on to our longstanding sterling negative bias
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 the 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 and we consider the recent EUR/GBP decline as corrective in nature. Last week, we kept a short-term wait-and-see approach as we were looking for the correction to fizzle out. Since Monday there are some signs that the sterling rebound is indeed losing momentum. Yesterday, we reinstalled a cautious buy-on-dips approach (0.9047 paints the neckline of a ST double bottom). We hold on to that bias. A drop below the 0.8841 ST reaction low would be a first warning. A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude.
