On Wednesday, EUR/USD extended the rebound that started on Monday. A further improvement in global investor sentiment and investors scaling back USD long ex-posure ahead of the FED policy meeting were the most obvious drivers for the EUR/USD gains. The pair was traded in the 1.3225 area at the start in Europe and moved gradually higher throughout the session, supported by a buoyant stock mar-ket performance. However, even at time the euro performance was not really spec-tacular. The Fed repeated that it was prepared to purchase long-term Treasury secu-rities if evolving circumstances indicated that such transactions would be particularly effective in improving conditions in private credit markets. So, quantitative easing through buying Treasuries is still an option but it is made conditional by its contribu-tion to the improvement in credit conditions. With markets more or less positioned for Fed Treasury buying, long-term yields jumped higher and also the dollar received support from the fact that aggressive, unconditional buying of Treasuries is no done thing yet. EUR/USD lost more than one big figure upon the release. The pair closed the session at 1.3166, almost unchanged from the close on Tuesday. The Fed warn-ing that inflation could stay below the levels that best foster economic growth (defla-tion was not mentioned) is somewhat of an ambiguous factor from a currency point of view. The news headlines on the Obama recovery plan might have been a slightly supportive factor for the US currency, too.
Today, the European calendar, amongst others, contains the German labour market data and the EU confidence data. In the US, the durable orders, jobless claims and new home sales are scheduled for release. On top of that, markets will take a close look at the implications of yesterday’s Fed statement and to the stock market reac-tion.
The Fed indicating that it targets the credit cost for the economy in the first place through the buying of spread products, rather than by influencing the global level of LT interest rates through buying Treasuries is a (temporary?) supportive factor for the dollar. Question of course remains how long the Fed can/will stay sidelined if Treasury yields would continue to move higher.
Since the start of the year, the currency market gradually gave more weight to nega-tive news from the euro zone. The deterioration of the European government fi-nances, 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 lower gear and the improvement in investors’ attitude towards risk caused EUR/USD to escape from an established MT downtrend. However, the rebound was far from convincing and yesterday’s EUR/USD reaction after the Fed statement only confirms the lack of upside momen-tum in the EUR/USD currency pair. A further narrowing of the intra-EU government bonds spreads would be a factor for markets to turn less euro negative. However, for now we are not impressed by the euro performance.
From a technical point of view, the correction from mid December brought EUR/USD back in the previous sideways range (capped by the 1.3300 area). The break above ST downtrend channel (cf. graph) was a short-term positive sign, but subsequent follow through price action was disappointing. We turn neutral on EUR/USD. The pair is ‘locked’ in a ST 1.2765/1.3490 (previous high) trading range. Within this range we still prefer a cautious buy-on-dips approach. A sustained re-bound beyond the 1.3330/87 area would further improve the ST EUR/USD picture.
On Wednesday, USD/JPY recorded a gain of more than one big figure. The im-provement in global risk appetite (as mirrored in the stock market performance) and the Fed interest rate decision (no buying of Treasuries yet, cf supra) were the main drivers behind the move. The pair closed the session at 90.26, compared to 88.97 on Tuesday.
This morning, Japanese retail trade data came out on the weaker than expected. The Nikkei posted a gain of 1.7% but this was not able to support USD/JPY. EUR/JPY selling through the cross rates also caps the upside in USD/JPY. Ru-moured Japanese exporter selling might have played a role, too. Tomorrow, the Japanese eco calendar is extremely heavy (labour market data, CPI, production, housing data!).
Looking at the charts, USD/JPY 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 pat-tern. Intervention fears apparently ‘paralysed’ the long standing yen-strengthening trend. We remain yen positive longer term but don’t add/reinstall yen long exposure at the current level. We keep a wait and see approach and look for a more pro-nounced up-tick (caused by interventions or by something else) reinstall USD/JPY short exposure.
On Wednesday, sterling made some additional gains against the euro. The im-provement in global market sentiment and in particular the rebound in UK financial stocks supported the UK currency. Additional profit taking on the recent EUR/GBP rebound probably played a role too. Prime Minster Brown warned against any poli-cies directed at managing the pound’s exchange rate. The BOE policy focus should be on inflation targeting. There were no UK eco data to guide sterling trading. EUR/GBP closed the session at 0.9243 compared to 0.9313 on Monday.
This morning, nationwide house prices came out at -1.3% M/M and -16.6% Y/Y, close to expectations. There are no other data on the UK calendar today. BoE’s Blanchflower gives a speech, but his view is well known.
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 made a forceful correction, but the sterling rebound ran into resistance last week. The break above the 0.9134-neckline (double bottom) made the ST picture again sterling positive. Growing market specu-lation 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 lost momentum. We are not in a hurry to add to EUR/GBP long exposure at the current levels but continue to look for addition corrective price action 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).
