On Friday, EUR/USD traders kept a wait-and-see mode ahead of the key US payrolls report. The pair tested bids in the 1.2750 area at the start of trading in Europe. EUR/USD tried to gain some ground in step with the constructive stock market sentiment, but the gains were limited and the pair gave up most of these early gains in the run-up to the US payrolls report. The report came (again) out very weak, but global markets ignored the bad news. Stock extended their rebound and yields went higher. EUR/USD at first showed a hesitant reaction, but gradually the pair joined the positive investor sentiment in other markets. Investors apparently drew the conclusion that the poor US payrolls report would force the US authorities to take drastic fiscal action soon and adopt the Obama plans. EUR/USD reached intraday highs in the 1.2990 area and closed the session1.2940 compared to 1.2790 on Thursday. Friday’s EUR/USD performance was far from spectacular, but at least the euro didn’t lose any further ground anymore.
Today, US eco calendar is empty. Markets will look out for the details of the Obama Plans to support the economy and the financial sector. In a market context, the key question remains whether the Obama plans will be enough to support the tentative signs of improved global investor sentiment that became apparent last week. From a euro point of view, the way intra-EMU government bonds spreads evolve will still be an important input for the global euro sentiment.
Since the start of the year, the EUR/USD continued to fight an uphill battle. 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 US eco story was also far from brilliant, but the dollar took advantage from its safe haven status. Over the previous two weeks, 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 outperform the euro from the current levels. However, already for some time, the market clearly has a euro skeptic attitude. Even some factors that could be seen as euro supportive (narrowing intra euro government bond spreads, improvement in global sentiment) until now were not able to change the course of events in favour of the euro. So, even as EUR/USD shows some tentative signs of bottoming out, the indecisive EUR/USD trading pattern remains in place. In this environment we do not frontrun on a major EUR/USD up-leg.
From a technical point of view, the correction from mid December brought EUR/USD again 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 the 1.2330 area (2008 low). A sustained rebound beyond the 1.3031 area (Boll midline) and even more above the 1.3330/85 area (MT reaction highs) is needed to improve the ST EUR/USD picture. Last week’s multiple test of the downside suggests that the downside in this pair has become a bit better protected. However, the price action in Asia this morning suggests that EUR/USD won’t enjoy a big support from a further improvement in global investor sentiment.
On Friday, USD/JPY extended its rebound that started on Thursday afternoon. The global market optimism on the potential positive economic impact from the US rescue packages was the most important driver. However, the ongoing flow of very negative news from the Japanese economy at some point might become a (slightly) yen negative factor, too, or might at least become an excuse to reduce some yen long exposure. So, USD/JPY trended again higher in step with the rise in global stock market. The pair closed the session at 91.89, compared to 91.23 on Thursday.
This morning, Japanese eco data painted again a bleak picture from the Japanese economy with most indicators published deeply in negative territory. However, some activity data were less negative than feared. Nevertheless, Japanese stock markets were not able to extend the rebound in Europe and the US on Friday. The Nikkei closed the session with a loss of 1.33%. USD/JPY revisited the key 0.9225 support area at the start of trading this morning, but the test was again rejected with the pair trading in the 91.00 area at the moment of writing.
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 the downtrend slowed below 0.9000 (amongst others on fears Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). On Thursday, USD/JPY did break out off a short-term consolidation pattern. This is another indication that the yen positive momentum might be waning. It is much too early to call off the era of yen strength. Nevertheless, if global market sentiment would become less risk averse, there might be room for a more pronounced rebound in USD/JPY. At the end last week, we changed our short-term neutral bias for US/DJPY installed a cautious ST buy-on-dips approach. The 94.65 reaction high is the first high profile point of reference on the charts.
On Friday, the EUR/GBP pair took a breather after the rather violent swings of the previous sessions. Sterling tried to extend its rebound at the start of trading in Europe (setting a new correction low in the 0.8663 area). However, there was no follow through and the pair settled in a sideways trading pattern in the 0.87+ area. The UK data came out mixed (PPI higher than expected/production data weaker than expected), but had no lasting impact on trading. The improved global investor sentiment was no clear driver for this pair either. EUR/GBP closed the session at 0.8752, almost unchanged from the 0.8755 close on Thursday.
Today, UK calendar is empty. Later this week, we look out for the BoE inflation report on Wednesday.
On the technical charts, the break above a series of high profile resistance levels in November/December 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 finally dropped below the key 0.8840/00 neckline/support area. This high profile technical signal obliged us to give up our short-term EUR/GBP positive bias. From a fundamental point of view, we remain sterling skeptic. 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 has gained 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 shortterm trend.
