On Tuesday, EUR/USD trading was affected by different, conflicting signals. The euro was well bid early in European trading. The improvement in global market sentiment on Monday and technical considerations caused some additional scaling back of EUR/USD shorts. The German IFO business confidence came out slightly better than expected and EUR/USD rebounded temporary above the 1.33 mark after the publication of the release. However, European eco data are seldom able to set the tone on the currency market for a prolonged period of time. European stock markets failed to build out Monday’s gains and this also capped the upside of the euro. The euro correction accelerated during the US trading hours (coinciding with a rather steep decline ion oil prices at that time). EUR/USD closed the session at 1.3160, even slightly lower compared to the 1.3189 close on Monday. So, EUR/USD experienced a rather volatile trading session, but in the end the global picture hasn’t changed.
Overnight, the economic news providers give some attention the US bad bank plan that might be set up by the Obama administration. This is seen a (potential) support to revive the credit markets and supports the euro this morning.
Today, the European calendar contains the first regional CPI data and confidence data in some member countries. However, the focus of all markets will be on the Fed interest rate decision.
Regarding the Fed decision, the key question is whether Bernanke & Co will make a next step in their move to quantitative easing and announce the outright buying of longer-dated US Treasuries. The uncertainty ahead of the Fed decision might be slightly USD-negative today. A strong Fed commitment to take this step in theory should be dollar negative, too. However, recently the reaction in EUR/USD to this kind of news mostly occurred through the impact on global investor sentiment/on the global stock market performance.
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 an established MT downtrend on Monday. Yesterday’s EUR/USD gains were far from spectacular, but if pressure on the intra-EU government bonds spreads would continue to ease, this could also be a factor for markets to turn less euro negative. Of course, today, the focus will be on the US side of the EUR/USD equation with the Fed meeting on the agenda (cf supra).
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). Recently, we indicated to take a close look at the established ST downtrend channel. (cf. graph). On Monday, EUR/USD rebounded above this channel (today 1.2980 area). This break improves the ST technical picture. In day-to day perspective, we maintain a cautious buy-on-dips approach. However, tight stop-loss protection remains warranted (1.2980 area). A sustained rebound beyond the 1.3330/87 area would further improve the EUR/USD picture.
On Tuesday, USD/JPY showed no clear direction. Strong Japanese stock market gains initially supported USD/JPY with the pair testing the 90 area at the start of trading in Europe. However, global risk appetite diminished in Europe and USD/JPY returned the 0.89 area later in the session. The pair closed the day at 88.97, little change from the 89.10 close on Monday.
This morning, the Nikkei made some cautious gains. However, the impact on USD/JPY trading is limited.
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). Over the previous week, USD/JPY showed a lacklustre trading pattern. Intervention fears apparently ‘paralysed’ the long standing yen-strengthening trend. We remain yen positive longer term but don’t feel comfortable to add/reinstall to yen long exposure at the current level. We keep a wait and see approach and look for a more pronounced uptick (caused by interventions or by something else) reinstall USD/JPY short exposure.
On Tuesday, sterling regained some further ground against the euro. There was no really high profile story to explain this move. Technical considerations (profit taking on the recent EUR/GBP rally) played a role. The easing of pressure in the UK banking sector might have been a factor too. The CBI distributive trades report came out mixed and had no lasting impact on EUR/GBP trading. EUR/GBP closed the session at 0.9313, compared to 0.9425 on Monday.
Today, the UK calendar is empty. So, global factors and the technical picture will have to set the tone for sterling 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 positive for EUR/GBP. At 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 supported 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 and continue to look for a correction to do so. The targets of a short-term head and shoulders formation are in the 0.9200/0.9152 area. Sustained 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).
