On Tuesday, EUR/USD lost again ground. The pair came under pressure from the start of trading in Europe. The dollar may have profited from the Fed’s reluctance (FOMC statement) to start buying long-dated Treasury securities. On the other hand, the less buoyant sentiment on the European stock markets weighed on the single currency. Markets sources also linked the first leg of the EUR/USD decline to comments from ECB Trichet, as he said that the ECB could take more unusual measures and that rates could be reduced below 2%. However, we don’t see much new info in this quote compared to what the ECB president brought forward at the ECB press conference. So, EUR/USD set a reaction low in the technical important 1.3030 area just before noon. The euro rebounded going into to US trading session. The US data (durable orders, new home sales and jobless claims) were all weak to very weak. However, the euro was not able to make any sustained gains against the dollar. On the contrary, the data weighed on global investors’ sentiment and EUR/USD returned to the intraday lows, but this time the break succeeded. Comments from George Soros that the euro may not survive without a EU plan to deal with toxic debt added to the euro negative sentiment. EUR/USD closed the session at 1.2954 compared to 1.3166 on Wednesday. It is remarkable that the euro decline (reinforced by Soros or not) occurs at a time that intra-European government bond spreads narrowed.
Today, the US calendar is very interesting with the Q4 GDP, Chicago PMI and the Michigan confidence on the agenda. In Europe, the flash CPI estimate for the month of January will be published. The CPI is interesting for the debate on the timing and the amount of additional ECB interest rate cuts. The US data also contain some valuable information on the health of the US economy. However, recently the link between (poor) US data and the dollar was very thin. Even more, poor US data often weighed on global investor sentiment and through the reaction on the stock markets, they tended to be a negative factor for the euro rather than for the dollar. This illustrates the underlying euro skeptic market sentiment.
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, it looked as if the EUR/USD decline shifted into lower gear as the improvement in investors’ attitude towards risk caused EUR/USD to escape from an established MT downtrend. However, the rebound lacked upside momentum and yesterday’s correction brings the 1.2765 reaction low again in the picture. The underlying debate on euro sustainability (cf. intra-EU government bonds spreads) and global investor/stock market sentiment will continue to be the drivers fro euro sentiment. Longer-term, we’re not convinced that the dollar should perform a sustained rally against the euro from the current levels. However, for now we can only take notice of the euro skeptic market sentiment.
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 drop below the 1.2765 reaction low (ST stop loss) would open the way for return action to the1.2330 area (2008 low). A sustained rebound beyond the 1.3330/87 area would improve the ST EUR/USD picture.
On Thursday, USD/JPY drifted gradually lower throughout most of the session. A less positive global investor sentiment and poor US data were the most obvious drivers for this USD/JPY slide. However, the gains of the yen were still far from convincing and Japanese currency even failed to regain the loss from Wednesday. USD/JPY closed the session at 90.03 compared to 90.26 Wednesday.
This morning, the Japanese eco calendar contained a very long series of important eco data (labour market data, CPI, production, housing data!). Almost all of these data were weaker than expected, illustrating the ongoing deteriorating in the Japanese economy. The Nikkei joined the decline in Europe and the US yesterday and closed today’s session with a loss of more than 3%. USD/JPY drifted slightly lower this morning.
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 pattern. Intervention fears apparently ‘paralyse’ 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 pronounced up-tick (caused by interventions or by something else) to reinstall/add USD/JPY short exposure.
On Thursday, sterling extended the rebound from the previous two sessions. The strong performance of the UK currency was a bit remarkable. There was no sterling supportive news and the global market context also brought no strong case for sterling buying. So, trading was again very much order driven. Overall euro skeptic sentiment might have added to the downward pressure in EUR/GBP. During the day, there were some market headlines on writings between the BoE and the Alistair Darling on the fund to purchase assets and on the implementation of the quantitative easing. Later in the session, BoE Blanchflower voiced its well-know view that monetary policy should be loosened further and quickly. He also said that sterling in undervalued. EUR/GBP closed the session at 0.9055 compared to 0.9243 on Wednesday.
This morning, Gfk consumer confidence dropped to -37 in January (from -33) Later today the UK (final) money supply data and the lending figures will be published.
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 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 maintained our sterling skeptic bias but indicated that we were not in a hurry to add to EUR/GBP long exposure as correction from the recent reaction high gained momentum. Yesterday, the pair cleared some ST supported levels, including the 0.9130 neckline. This is a first warning signal. A drop below 0.8840 would question our ST positive bias in this pair (stop-loss).
