On Tuesday, EUR/USD extended the decline from the previous sessions. There was not much new info to ‘explain’ the move. The market themes that were at work over the previous day continued to set the tone for trading yesterday. Global uncertainty, concerns on the economic budgetary situation in the EU and its impact on the financing of European governments and the deepening of the crisis in the financial sector were reasons for investors to stay away from the euro (and from sterling). ZEW economic sentiment came out better than expected, but in the current environment that was largely ignored by the (currency) markets. Later in the session, all eyes turned to the inauguration of president Obama. However, while broadly described as a as a historic moment, it didn’t change the course of events on markets. (US) stocks took another battering on uncertainty for the upcoming earnings season and on the fate of the banking sector. In this respect, the problems in the US are not less compared to the UK or the euro-zone area. However, until further notices, the dollar is still seen a better safe haven compared to the single currency. EUR/USD closed the session at 1.2904, compared to 1.3069 on Monday.
Today, the eco data calendar is again very thin, both in the US and in Europe. In the US only the NAHB housing market index is on the agenda. There European eco calendar is almost empty. Traders will keep an eye on speeches of Trichet and of ECB’s Bini Smaghi. However, the developments with respect to the credit crisis (and measures to address it) will again continue to set the tone for trading.
At the start of the new year, EUR/USD showed an indecisive trading pattern However, the market gradually gave more weight to the negative news coming from the euro zone. The deterioration of the European government finances, pressure on the Sovereign credit ratings in Europe and the widening of intra-govie spreads became an ever more important factor for EUR/USD trading. The dollar has regained the advantage of the doubt over the euro, especially in times of rising global market pressure. Longer-term we remain skeptic on the chances for a protracted dollar rebound as the budgetary and monetary environment (quantitative easing) in the US is not really USD supportive either. However, short-term, the sentiment obviously has become euro negative. Recently, we advocated keeping a close eye on the technical charts and as EUR/USD recently dropped below as series of rather important support levels, we couldn’t but draw our conclusions (stop loss).
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, a forceful correction kicked in and EUR/USD dropped below the top of the previous sideways range (1.3300 area). This made the picture again neutral to short-term negative. The break below the 1.3025 area opened the way for more downside price action in the previous 1.3300/1.2330 trading range. In a day-to-day perspective, the downtrend channel could be a guide for ST trading (cf graph). A drop below the LT downtrend line from the highs would be an additional negative (cf graph).
On Tuesday, USD/JPY was rather well supported at the start of trading and the pair even returned to the 91 area early in Europe. However, renewed pressure on the stock markets and in particular on the financial sector blocked ascent of USD/JPY and the yen came back in the drivers’ seat. USD/JPY declined throughout the remainder of the session and closed the day near the intraday lows at 89.76, compared to 60.64 on Monday evening.
This morning, Japanese leading indicator came out close to expectations. Today, the BOJ also started its policy meeting. The decision will be published tomorrow morning.
Looking at the charts, global market stress and overall dollar weakness in the wake of the 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 long-term trend in the pair remains negative, but recently we warned that the downtrend might slow below 0.9000 (among others as Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8715 reaction low). Market pressure is again mounting, but at least for now the gains of the yen against the dollar are not really that impressive. Last week, we advocated at least partial profit taking on USD/JPY shorts in case of return action towards the 2008 lows and indicated that there could room for a ST correction/ rebound in USD/JPY. The day-to-day momentum is yen positive, but we don’t feel that comfortable to add/reinstall to yen long exposure. The risk for interventions might continue to cap the upside of the yen, especially against the dollar.
On Tuesday, sterling came again under pressure. The move started in Asia and accelerated early in European trading. Sterling dropped to new all-time lows against the yen and cable broke the psychological barrier of 1.40. This also left its traces on EUR/GBP trading. The pair regained the 0.9130 neckline/previous high. This combination of negative technical signals in several sterling cross rates triggered additional sterling selling. From a fundamental point of view, markets came to the conclusion that the recent actions to support the UK financial system and to revive the flow of credit to the economy might have important side-effects for the currency, in the long term but also short-term. Yesterday the UK CPI figures came out mixed with the headline inflation declining less than expected, but the core tumbling from 2.0% Y/Y to 1.1%. The release didn’t really change the outlook for monetary policy. Later in the session, the decline of sterling against the euro slowed, probably do to underlying euro weakness. After the European close, BoE’s King in a speech indicated that the UK economy will likely shrink markedly in the first half of 2009 and that it is sensible for monetary policy to prepare for the possibility that it may need to move beyond the conventional instrument of Bank rate and to consider a range of unconventional measures. He mentioned the fall in sterling as a factor that would help the economy this year. However, EUR/GBP closed the session at 0.9265 compared to 0.9060 on Monday.
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. Since Monday last week, there are some tentative signs that the sterling rebound might be losing momentum The market reaction to the UK banking plan could be an additional indication that the sterling rebound against the euro has run its course. The break above the 0.9130-neckline (double bottom) made the ST picture again sterling positive. Mid last week we reinstalled a cautious buy-on-dips approach in EUR/GBP. We hold on to that tactics and the view that eh BoE is coming ever closer to unconventional measures might add to the negative sentiment. The targets of the ST double bottom are in the 0.9425 area.
