At the start of trading on Monday, it looked as if EUR/USD was set to extend the decline from last week. The pair extensively tested and even traded below the 1.2765 previous low. The poor start of the European stock markets was again a good excuse to sell the single currency. However, there was no convincing follow-through price action on the ‘break’ of the 1.2765 support and the pair entered calmer waters. The final European PMI was too close to expectations to have any lasting impact on EUR/USD trading. Remarkably, sentiment towards the single currency improved as soon as US traders joined the action, even if stock market futures were still in the red at that time. The US spending and income data had no lasting impact on trading. However, this was slightly different for the ISM from the manufacturing sector. The index improved from 32.9 to 35.6, well above the market consensus of 32.5. The price action in EUR/USD was not spectacular but again a bit surprising. It was the euro that gained against the dollar and not the other way as one would expect. So at least for now, the paradigm still holds that (global) bad news is seen bad for the euro while good news, even if it comes from the US, might have some positive impact on EUR/USD. There was also a lot of talk in the market about new measures that the US administration is setting up to address the financial crisis. However, the news/rumours/guesses were not specific enough to guide the (currency) markets. The pair closed the session at 1.2843 compared to 1.2813 on Friday.
Today, eco calendar is thin, both in the US and in Europe. The US vehicle sales will receive some attention. The European data are only of second tier importance. So, global factors will continue to set the tone for trading. In this respect, markets will continue to ponder the potential impact of all kinds of measures that are announced worldwide (Australian rate cut this morning + additional fiscal measures; BoJ stock buying plan, US plans to be announced…). At least for now, the market enthusiasm for those plans is guarded, to say the least. In this context, there is no convincing case to become EUR/USD enthusiastic at this stage. Uncertainty on the ECB policy approach ahead of Thursday’s ECB meeting might also cap the upside potential of the single currency.
Since the start of the year, the currency market 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-government 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. Early last week, there was a temporary easing in the EUR/USD decline. However, the rebound lacked upside momentum and EUR/USD yesterday revisited last week’s reaction lows. The underlying debate on euro sustainability (cf. intra-EU government bonds spreads) and global investor/stock market sentiment will continue to be important drivers for 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 there was no follow through price action, which was disappointing from euro point of view. Yesterday, the pair is extensively testing the 1.2765 support area (previous low). The test was rejected, but it’s too early to draw conclusions from yesterday’s price action. A sustained drop below the 1.2765/00 area still contains the risk for return action to the1.2330 area (2008 low). A sustained rebound beyond the 1.3172 area (Boll midline) is needed to improve the ST EUR/USD picture.
On Monday, USD/JPY again showed some intraday volatility, but basically the indecisive trading pattern was confirmed. The yen gained at the start of trading in Europe, but the trend was reversed early in US trading, with the batter than expected US ISM causing additional USD buying interest. USD/JPY closed the session at 89.45, compared to 89.92 on Friday.
This morning, the BOJ announced to buy $11bn of shares held by Japanese banks to easing pressure on the bank’s balance sheets. This triggered a temporary rebound in the Nikkei. However, there was no euphoria. The Nikkei even closed the session with a loss of 0.62%. The yen also lost some ground as markets hoped that the plan would ease investor risk aversion. However, in line with the stock market reaction, the USD/JPY ‘rebound’ soon evaporated.
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. The long-term trend in the pair remains negative, but downtrend slowed below 0.9000 (among others as Japanese officials probably will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). 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 to reinstall/add USD/JPY short exposure. Short-term the pair is blocked in a rather tight 87.10/91.30 consolidation pattern.
On Monday, most sterling cross rates showed again very wild swings. At the end of last week, sterling made quite an impressive rebound and the pair (temporary) dropped below the key 0.8840 neckline. Yesterday morning in Asia it looked as if sterling would continue its rebound. However, this wasn’t the case. From the start of trading in Europe, the pound came under pressure. New negative news headlines from the UK banking sector and uncertainty on the next BoE steps apparently were enough a reason to take profit on the recent sterling gains. This was the case for EUR/GBP shorts and for cable longs. Intraday stop-tripping was the name of the game. EUR/GBP set an intraday low in the 0.9080 area. The better than expected UK PMI for the manufacturing sector was no help for sterling. Later in the session, sterling trading entered calmer waters and EUR/GBP closed the session at 0.9002, compared to 0.8812 on Friday.
Today, the UK calendar contains only the PMI for the construction sector. However, news headlines from the UK banking sector (if any) and the debate on the BOE interest rate decision and the technical pictures will continue to be drivers 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 made a forceful correction. EUR/GBP tried to resume the longstanding uptrend, but the pair ran into resistance in the 0.95 area. This lower high on the charts pulled the trigger for another forceful correction and the pair extensively tested the key 0.8840 neckline (on Friday and yesterday). From fundamental point of view, we remain sterling skeptic (a deficit country in an environment that moves towards quantitative easing, ongoing uncertainty on the key banking sector, no clear signs of improvement in the housing market…). However, as was the case for EUR/USD, euro negative factors apparently were considered at least evenly important by the markets. Yesterday, the test of the key neckline (0.8840-area) was rejected, but we don’t cry victory yet. Sustained return action above the 0.9115/30 area longstanding uptrend line/previous neckline could be an indication that the downward pressure in EUR/GBP is easing.
