On Wednesday, trading in the EUR/USD currency pair showed two different faces. At the start of trading in Europe, the pair reversed its early Asian gains. There were no important eco data, but global economic uncertainty and the poor stock market performance kept the EUR/USD pair below the 1.30 barrier. The pair even set a new short-term low in the 1.2825 area after the open of the US stock markets. The S&P downgrade of the credit rating of Portugal at that time added to the euro negative sentiment. Ex-Fed president and Obama adviser Volcker warned on an undermining of confidence in the dollar, but at the time his view had no impact on EUR/USD trading. However, the tide turned later in the session as US stocks changed course. Stocks found a better bid and this improvement in global sentiment also supported the euro against the US currency. The prospect for additional measures as announced by Mr. Obama’s nominee for Treasury secretary, T Geithner, might have played a role. EUR/USD closed the session at 1.3023, compared to 1.2904 on Tuesday.
Today, the eco data calendar contains the US Housing starts and permits and the jobless claims. In Europe, the industrial orders and the ECB monthly Bulletin are on the agenda. The US data might have some intraday importance for EUR/USD trading, but global sentiment on financial markets will still set the tone for trading. In this respect, EUR/USD traders will take a close look whether stocks will be able to build out yesterday’s rebound.
Since the start of the new year, the currency market gradually gave more weight to 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 doubt over the euro, especially in times of rising global market pressure. Yesterday, EUR/USD showed some relief on an improvement in global market sentiment. However, intra-EU government bonds spreads continued to widen. So, the jury is still out as to whether investors will tone down their euro-skeptic sentiment. 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 (cf Volcker). However, for now this theme obviously is no item for the currency markets.
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. In a day-to-day perspective, the ST downtrend channel could be a guide for ST trading (cf graph). A sustained break above the channel top (Red line, today 1.3180 area) would improve the ST technical picture. A drop below the LT downtrend line (green line) from the highs would be an additional negative.
On Wednesday, USD/JPY showed one very wild swing. The pair hovered in a very tight range around the 90 barrier most of the session. There was no high profile news to explain the move. Option barrier related activity is a likely explanation. However, the dip was short-lived. The pair recouped most of its intraday losses and closed the session at 89.49, compared to 89.76 on Tuesday.
This morning, the BOJ, as expected, left rates unchanged at 0.1%. The BOJ said it would buy corporate bonds to ease the pain of the current funding squeeze. The bank also warned on the impact from sharply declining exports on the economy. The Bank expects the economy to shrink 2.0% in the current fiscal year and 1.8% in the year to 2010. Finance Minister Nakagawa warned again that rapid forex moves are not good and that he was watching the moves carefully.
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, but yesterday the pair rested the lows. 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). 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 yen momentum/technical picture remains yen positive, but we don’t feel 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 Wednesday, sterling remained under pressure, not only against the euro, but also against the dollar and the yen. The prospect for more unconventional BoE measures as recently voiced by UK policy makers continued to weigh on sterling. UK labour market data were close to expectations and also the Minutes from the previous BoE meeting brought no real news. EUR/GBP set and intraday high in the 0.9425/30 area and closed the session at 0.9327 compared to 0.9262 on Tuesday. Overnight, there was a lot of market talk that sterling weakness could become a subject at the next G7 meeting, according to an ‘anonym source’. The source also quoted that the weakness of sterling is obviously a problem for Europe. In a FT interview, a member from the debt management office said that he didn’t belief that the sterling weakness was a problem for raising Funding, but admitted the chance of a bond auction failing had risen ‘because we are having more than ever before’.
Today, the CBI quarterly trends are on the agenda.
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 was losing momentum. Market reaction to the UK banking plan was 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. The targets of the ST double bottom (0.9425) were met yesterday. This might lead to some more consolidative price action short term. Longer term, we hold on to our established buy-on-dip approach.
