On Tuesday, EUR/USD showed a remarkable rebound. The pair set a new reaction low on Monday in the 1.2705/10 area, but recouped some losses since. Recently, the EUR/USD price action was often driven by global market sentiment. Global good news and improvement sentiment mostly support the single currency; economic and market uncertainty weighed on the euro. This trading pattern at least partly explains yesterday’s move. However, we have to admit that for example the intraday correlation between EUR/USD and the stock markets was far from one-to-one. A lot of sources also link yesterday’s price action on global markets (not only in EUR/USD, but also in the stock markets and the bond markets) to the better than expected pending home sales. We don’t join this analysis. And even if this would be the case, the price action told more about global market sentiment rather about the content of the data. So, the tentative easing of global market pressure (stocks avoided a retest of the lows) and technical/tactical considerations probably induced some profit taking on EUR/USD shorts. The second test and consequent break above the 1.2900 resistance area (previous highs on hourly charts) reinforced this short-covering move. EUR/USD closed the session near the intraday highs in the 1.3040 area, quite an impressive gain compared to the 1.2843 close on Monday. Recently similar, orderdriven repositionings were also seen in other cross rates (cable, EUR/GBP and the AUD, amongst others).
Today, the eco calendar is again well filled. In Europe the PMI’s from the services sector are scheduled for release. In the US, markets watch out for the ADP labor market report and the ISM non-manufacturing survey. For the ADP, the consensus expects an improvement from -693K to -535K. With respect to the ISM survey, it will be interesting to see whether the improvement of the manufacturing sector will also be visible in this survey. We don’t have a strong opinion on the outcome of these US data, but in case of a material improvement, this could fuel the cautious optimism from the previous two sessions and help the euro to build out its upward correction.
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. Since last week, the EUR/USD decline shifted into a lower gear and yesterday the euro even gave the impression that there could be room for a technical rebound. Longer-term, we’re indeed not convinced that the dollar should perform a sustained rally against the euro from the current levels. However, recently the market clearly had a euro skeptic attitude, keeping a close eye on the intra euro government bond spreads. Yesterday’s Euro rebound was inspired by an improvement in global risk appetite and this factor can still have its impact today. However, the debate on the intra-EUM tensions is far from solved and will resurface. Uncertainty on the ECB policy approach could also hamper the EUR/USD rebound. To conclude, EUR/USD shows some tentative sings of bottoming out. In a day-to-day perspective, the euro might gain some further ground in line with the short-term market sentiment. However, we don’t the need to front-run on a major break-out yet.
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. The pair is extensively testing the 1.2765 support area (previous low) with a reaction low/fast break at 1.2706. The test was rejected, and the euro performed a technical rebound since. 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 1.3123 area (Boll midline) and even more above the 1.3330/85 area (MT reaction highs) is needed to improve the ST EUR/USD picture. In a day-to-day perspective we see room for some additional gains with the ST consolidation pattern.
On Tuesday, the USD/JPY trading pattern was hardly changed from what happened over the previous session. The pair showed again some intraday volatility, but basically the indecisive trading pattern was confirmed. The pair reached an intraday low early in US trading, but recouped most of the losses in step with the improvement global sentiment/stock market gains later in the session. USD/JPY closed the session at 89.44, close to unchanged from the 89.45 close on Monday.
This morning, Asian stocks extended their rebound. The improvement in the Chinese PMI might have played a positive role. However, the impact on EUSD/JPY is limited (if not un-existent) for now.
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 locked in a rather tight 87.10/91.30 consolidation pattern.
On Tuesday, EUR/GBP settled in a sideways consolidation pattern, digesting the sharp upswing on Monday. Stop-tripping in EUR/USD and cable caused some intraday volatility, but was not bale to give the pair a clear trend. At least for now, the improvement in global risk sentiment is not really a big support for the sterling against the euro. EUR/GBP closed the session at 0.9016 compared to 0.9003 on Monday.
Overnight, Nationwide consumer confidence dropped again sharply from 48 to 40. EUR/GBP tends to move slightly higher ahead of the open of the European markets. Later today, Services PMI and the BRC shop prices will be released. The consensus expects the PMI stabilize close to the lows set over the previous two months. Earlier this week, the slightly better than expected manufacturing PMI brought no sustained support for sterling. Investors probably will be in a wait-and-see mood ahead of tomorrow’s BoE and ECB interest rate decision.
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 on Monday). From a 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. The rejected test of the key neckline (0.8840-area) called off the ST downward alert in this pair. For now, we stay neutral on EUR/GBP. Sustained return action above the 0.9126/30 area longstanding uptrend line/previous neckline would improve the ST picture for EUR/GBP.
