On Thursday, the focus in EUR/USD trading was on the ECB interest rate decision. EUR/USD traded in the 1.3135/1.3235 area ahead of the decision, but the pair spiked southwards after the announcement of the 50 basis points rate reduction. The single currency tried to fight back at the start of the press conference but the rebound was very short-lived. The ECB assessment that the economic situation is worse than the Bank had anticipated at the end of last year was probably seen as a good excuse for additional EUR/USD selling and the pair returned soon below the 1.31 mark. Question is whether an “on hold” decision would have been any support for the euro. The US data were mixed and had no lasting impact on EUR/USD trading. Stock market showed again steep losses and at the current juncture, risk aversion is seen euro negative. However, stocks rebounded alter in US trading and this also helped EUR/USD to recoup part of the earlier losses. EUR/USD closed the session at 1.3115, compared to 1.3191 on Thursday.
Today, the European calendar only contains some second tier releases. In the US the calendar is better filled with the CPI, the TIC data, the industrial production and Michigan confidence scheduled for release. We especially look out for the activity data (IP, Michigan confidence). The new measures to support the US banking sector and the results from Citi and BoA might have some impact on global market senti-ment, too.
At the start of the new year, EUR/USD showed an indecisive trading pattern How-ever, the market gradually inclined to give more weight to the negative news coming from the euro zone. The deterioration of the European government finances became an ever more important factor for EUR/USD trading. The reaction of EUR/USD to yesterday’s ECB rate cut only confirmed the euro skeptic market attitude of late. It is a bit strange to call the dollar the preferred save haven currency, but for now the US currency is preferred by default over the euro. In this respect it will be interesting to see whether the euro would receive some support in case the overall (stock) market sentiment were to turn less negative. More negative news headlines on the credit quality of the European member states remain a potential negative factor for the euro. Longer-term we continue to have doubts on the chances for a protracted dollar rebound as the budgetary and monetary environment in the US is not really USD supportive either.
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 sec-ond half of December and in a forceful correction, EUR/USD dropped below the top of the previous sideways range (1.3300 area). This removed the MT Euro positive bias and makes the picture neutral to negative short-term. In a day-to-day perspec-tive, we tend to turn less negative on the euro and look whether some consolida-tion/technical rebound might be at hand.
On Thursday, USD/JPY showed quite a decent performance. It was already visible over the previous sessions that the yen was not really able anymore to take full ad-vantage of the global negative investor sentiment/stock market decline and this feel-ing was confirmed yesterday. USD/JPY set an intraday low in the 0.8850 area early in Europe but from that point the pair started a gradual comeback. The poor open on the US sock market hardly caused any setback in this rebound and USD/JPY closed the session at 89.94, compared to 89.05 on Wednesday. Overnight global sentiment improved further on the US measures to support the banking sector and USD/JPY regained the 90.00 mark.
This morning, Asian/Japanese stock markets show moderate gains (among others supported by a constructive market reaction to Intel results published after the bell in the US yesterday evening). BOJ Governor Shirakawa warned that the economic and financial conditions continued to deteriorate and he also repeated the Bank’s ‘com-mitment’ to support the proper functioning of the financial system at to ease corpo-rate funding. The buying of CP is one of the ways to execute this policy intention.
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. In a day-to day perspective, we recently warned that 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. Yesterday, we advocated partial profit taking in case of return action towards the 2008 lows. In a day-to-day perspective we see more room for a ST correction/rebound in USD/JPY.
On Thursday, EUR/GBP to some extent joined broader euro decline. However, the correlation was not really one-to-one. EUR/GBP more or less copied the EUR/USD moves at the time of the ECB interest rate decision and press conference. However, the pair didn’t join the euro rebound/correction later in the session. Sterling appar-ently received some support from the easing of risk aversion later in the US trading session. EUR/GBP closed the session at 0.89601, compared to 0.9030 on Wednes-day and UK currency recorded some additional gains overnight.
Today the UK eco calendar is again empty. However, a lot of market talk will be dedicated to a new package of measures to support the banking sector that is ru-moured to be announced after the weekend. The plan could contain new capital in-jections into banks, relaxation of rules on balance-sheet strength and government guarantees of toxic assets on bank balance sheets. A priori we don’t have a strong view on what the impact of such a plan should be for sterling. However, at least for now, markets tend to consider it (cautiously) sterling positive.
At the start of 2009, pressure on sterling eased and this trading pattern was even ex-tended after last week’s BoE interest rate decision. On top of that, Euro skepticism also weighed on EUR/GBP. Nevertheless, the sterling rebound against the euro ran into resistance earlier this week. .
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 fiz-zle out. Since Monday there are some signs that the sterling rebound is indeed los-ing momentum. On Wednesday, we reinstalled a cautious buy-on-dips approach (0.9047 paints the neckline of a ST double bottom). We hold on to that bias even if we have to admit that yesterday’s EUR/GBP performance was not really convincing. 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.
