On Thursday, EUR/USD basically held a sideways trading pattern. EUR/USD traders were in a wait-and-see mode ahead of the ECB interest rate decision. The bank as expected left rates unchanged at 2%. This didn’t come as a big surprise after last month’s press conference. Nevertheless, EUR/USD showed a kneejerk decline as soon as the announcement flashed on the screens and a similar move occurred at the start of Trichet’s press conference. EUR/USD at that time reached intra-day lows in the 1.2765-area. Markets apparently were still a bit disappointed that ECB wasn’t as aggressive as other central banks like the Bank of England or the Fed. However, the move had not strong legs and later in the session, EUR/USD returned above the 1.28 big figure. The improvement in stock market sentiment after the open of the US stock markets gave the euro again some downside protection. Indeed, EUR/USD found a bottom, the bottom line conclusion remains that the euro performance is not convincing. EUR/USD closed the session at 1.2790, compared to the 1.2849 close on Wednesday evening. So, even in a context of improved global market sentiment, the pair lost some ground.
Today, markets will watch out for the US payrolls report. In the current juncture, it is very difficult to assess the number of job losses and compare it with the consensus, as due to technical factors (seasonal adjustment), wild swings are possible. So, we don’t make any prediction on the outcome, but over the previous days, global market sentiment tended to become slightly less negative. In this context, a better than expected/ less negative payrolls report could be an important factor to support the tentative change in sentiment. In such a scenario, stock markets and yields probably will go higher. In theory, this should also be a supportive factor for the single currency. However, looking at the price action over the previous sessions, we don’t feel the needed to speak load on this theme.
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 Member states’ 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 but any attempts to change the trend immediately ran into resistance. Longer-term, we’re not convinced that the dollar should perform a sustained rally against the euro from the current levels. However, already for quite some time, the market clearly has a euro skeptic attitude. Over the recent days the there were some factor that could be seen as euro supportive (narrowing intra euro government bond spreads, improvement in global sentiment). However, until now, none of these EUR/USD supportive factors was able to really change the course of events for EUR/USD trading. So, even as EUR/USD shows some tentative signs of bottoming out, the current indecisive trading pattern might continue for some time. We don’t front-run on a major EUR/USD up-leg 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 pair extensively tested the 1.2765 support area (previous low) with a reaction low/fast break at 1.2706. The test was rejected but the subsequent rebound was (again) disappointing. 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 1.3034 area (Boll midline) and even more above the 1.3330/85 area (MT reaction highs) is needed to improve the ST EUR/USD picture. The short-term trend is euro negative and we don’t blow against the wind.
On Thursday, USD/JPY (and some other yen cross rates) unlocked the stalemate that reigned recently. A rebound on the stock markets and probably also the US debate to amend to market-to-mark rules were seen as a good reason to take more risk on board or at least to scale back defensive yen long positions. Stop-loss buying after the break of the recent (very) narrow range reinforced the move. USD/JPY set an intraday high in the 92.25 area and closed the session at 91.23, compared to 89.43.
This morning, Japanese/Asian stocks extend the rebound in the US yesterday evening. However, for now this is not enough for USD/JPY to record some additional gains. Rumoured hedging of exports flows is said to cap the USD/JPY upside.
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). Recently, we advocated being reluctant to add/reinstall yen long exposure at levels below USD/JPY 90. Yesterday’s rebound was quite spectacular but didn’t change the long term trend that is still yen positive. Nevertheless, if global market sentiment would become less risk averse, there might also be room for a more pronounced rebound in USD/JPY. Yesterday’s rebound/ break is a first indication that we could be in for such a correction. In case of a (temporary?) change in sentiment after a long period of directionless trading, the reposition can be rather violent. We change our short-term neutral bias and tend play the USD/JPY rebound/correction. The 94.65 reaction high is the first high profile point of reference on the charts.
On Thursday, sterling extended the rebound from the previous days. Easing global market tension, some (cautiously) better than expected/less negative than expected UK data and hope that the BoE and UK government measures will support the UK economy caused investors to turn less negative on sterling. This pattern was extended yesterday. The BOE cutting interest rates to 1% was no factor of importance in this debate and didn’t hamper the sterling rebound. Technically inspired stop-loss buying of sterling in several cross rates (cable, GBP/EUR and last but not least GBP/JPY!) reinforced the move. EUR/GBP dropped below the key 0.8840/00 area and close the session at 0.8755, compared to 0.8881 on Wednesday.
Today, UK calendar contains the PPI data and the December production data. It will be very interesting to see the market reaction in case of weaker than expected production data. Will that be able to stop the rebound of sterling? Considering the shortterm market momentum we are not convinced about this.
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 0.8840/00 neckline, effectively breaking it yesterday. This wiped out our ST EUR/GBP positive bias (Stop loss). 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, in a short-term perspective, we can’t ignore the technical signal(s) in several sterling cross rates. The euro continues to fight an uphill battle while the scaling back of sterling shorts is gaining momentum. So, short-term players can try to play this technical break. A sustained drop below the 0.8663 area (previous high profile high) would reinforce the short-term sterling positive picture. Long term, we still consider the current move as corrective in nature, but for now this is no good reason enough to fight the short-term trend.
