On Monday, EUR/USD started trading in Europe in the 1.29 area. However, during the day, the euro gained momentum. There were no important eco data but a constructive price action on the European stock markets and global investors turning less risk averse supported the single currency. The euro rebound even accelerated as soon as US traders joined the action. The corporate news flow was mixed, but this time investors mostly took the news from the positive side. The US eco data (leading indicators and existing home sales) were also better than expected. While not overly important from a macro point of view, the releases supported global investor sentiment and consequently also the euro. The euro remained well bid and despite US stock markets giving up an important part of the early gains, EUR/USD closed the session at 1.3189, compared to 1.2975 on Friday evening. After the European close, Eurogroup chairman Jean-Claude Juncker indicated being concerned about winding spreads between the European government bonds, but saw no risk of the single currency region break-up. Juncker also said he was not very happy about the recent volatility in the FX market and said it will be discussed at next month’s G7 meeting. ECB’s Weber said that a considerable reduction in euro zone inflation rates is likely in the near future. He indicated that future rate cuts will depend on the data and on economic developments. Nevertheless, euro 2-year yields yesterday showed quite an impressive rise. A lot of ECB members warning that the bank is reluctant to cut rates beyond 2% might have supported this move (and to some extent also the single currency).
Today, the German IFO release will be published. In the US, markets look out to the S&P/CS house price index, consumer confidence and the Richmond Fed index on the manufacturing sector. Both for the IFO and for the US data series, it will be interesting to see whether the tentative signs of stabilization seen in some other (less important) indicators will be confirmed. Even in case of a moderate improvement, it would be much too early to draw conclusions for the longer term. However, such an outcome could support some easing in global risk aversion. Recently this was a support factor for the euro.
Since the start of the year, the currency market gradually gave more weight to negative news from the euro zone. The deterioration of the European government finances, pressure on the Sovereign credit ratings and the widening of intra-govie spreads weighed on the single currency. The dollar has regained the advantage of doubt over the euro, especially in times of rising global market pressure. At the end of last week, the EUR/USD decline shifted into a lower gear and the improvement in investors’ attitude towards risk caused EUR/USD to escape from the established MT downtrend yesterday. If pressure on the intra-EU government bonds spreads would ease, this could also be an indication that global market sentiment towards the euro would turn less negative. The next milestone for US monetary policy (and for its potential impact on the currency markets) is tomorrow’s US Fed meeting. We don’t expect any high profile new steps. However, it will be interesting to see whether any new (quantitative) measures are in store in case longer-term US Treasury yields were to rise further. Uncertainty ahead of the Fed interest rate decision might be an excuse to reduce/cash some profits on recent EUR/USD decline.
From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern (cf. graph). However, a forceful correction kicked in and EUR/USD dropped below the top of the previous sideways range (1.3300 area). That made the picture again neutral to short-term negative. Over the previous days, we indicated to take a close look at the established ST downtrend channel. (cf. graph). Yesterday’s, EUR/USD rebounded above this channel (today 1.2980 area). If confirmed, this would improve the ST technical picture. In day-to day perspective, we reinstall a cautious buy-on-dips approach. However, tight stop-loss protection remains warranted (1.2980 area).
On Monday USD/JPY hovered up and down in a roughly 0.8850/89.70 trading range. The pair gained moderately ground throughout the session, but the gains were far from impressive given the better than expected US data and the positive stock market sentiment. USD/JPY closed the session at 89.10, only a very limited gain compared to the 88.75 close on Friday.
This morning, the Nikkei jumped 4.93 %, supported by a government plan to buy shares in companies whose future has been threatened by the financial crisis. The stock market rebound helped USD/JPY to record some limited gains this morning. The minutes of the Dec 18-19 meeting showed internal debate on the effectiveness of rates close to zero for the functioning of the money markets.
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 last week the pair retested 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 0.8710/15 reaction low). Lately, we advocated at least partial profit taking on USD/JPY shorts in case of return action towards the lows (87.00- area) and indicated that there could be room for a ST correction/ rebound in USD/JPY. The momentum/technical picture remains yen positive, but we still don’t feel comfortable to add/reinstall to yen long exposure at the current level. The risk for interventions might continue to cap the upside of the yen, especially against the dollar. We keep a wait and see approach and look for a more pronounced up-tick (caused by interventions or by something else) to add/reinstall USD/JPY short exposure.
On Monday, the EUR/GBP currency pair experienced a rollercoaster trading session. Negative press headlines over the weekend (BoE’s Blanchflower advocating zero interest rates and declining Hometrack house prices, amongst others) weighed on sterling at the start of the new trading week. However, a (temporary) easing in global market tensions and some positive news headlines from the UK banking sector (Barclays) triggered some short-covering on the recent sterling sell-off. EUR/GBP declined from session highs in the 0.95 area just before the start of trading in European to an intraday low in the 0.9340 area around noon. However, sterling couldn’t hold on to its earlier gains and closed the session at 0.9425, compared to 0.9402 on Friday.
Today, CBI distributive trades report will be published. The potential debate on sterling weakness on the G7 meeting might give sterling some (limited) support shortterm. However global market sentiment and prospects for UK monetary policy will continue to be the major drivers for EUR/GBP trading.
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. Last week, the sterling rebound ran into resistance. The break above the 0.9130- neckline (double bottom) made the ST picture again sterling positive. Growing market speculation that UK interest rates will move to zero soon and that the UK is still rather pleased with the depreciation supports the sterling negative sentiment. Recently, we had a buy-on-dips approach in EUR/GBP. In a day-to-day perspective, the EUR/GBP rebound is losing momentum. We are not in a hurry to add to EUR/GBP long exposure at the current levels but look for a correction to do so. Return action below the 0.9130 area would be a first warning signal. A drop below 0.8840 would question our ST positive bias in this pair (stop-loss).
