On Wednesday, EUR/USD basically extended the sideways trading pattern from the previous sessions. Intra-day volatility was even less compared to the rather wild swings on Monday and on Tuesday. European stock markets entered calmer waters after the ‘Geithner disappointment’ on Tuesday and this helped EUR/USD to record some moderate gains. EUR/USD tested the 1.30 mark after weaker than expected US trade balance data, but the pair was (once again) not able to maintain its gains and closed the session at 1.2906, little changed from the 1.2913 close on Tuesday. The announcement of a compromise (Senate and House) on the US stimulus package triggered a small rebound on the US stock markets late in the session and this also caused EUR/USD to recover off from the intraday lows.
Today, European production data will confirm all the bad news from the European economy that was already published during the previous weeks. In the US, markets will watch out for the retail sales and the jobless claims. Especially the retail sales are an interesting eco release. However, a monthly figure won’t change the global picture at once. So, as was often the case recently, the market reaction will tell at least as much on underlying market sentiment (risk aversion risk appetite) as on the content/assessment of the data.
Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government spreads weighed on the single currency. The euro also remains a pointer of global risk aversion. Negative headlines on the development of the credit crisis often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar most often 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. The EUR/USD currency pair apparently found some kind of short-term equilibrium. This is more or less in line with the picture painted on the major stock market indices. 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 support the euro. Over the previous days, ECB speakers turned ever more pessimistic on the faith European economy. However, this was also not able to unlock the current stalemate. So, EUR/USD shows some tentative sigsigns of bottoming out but the indecisive EUR/USD trading pattern remains in place.
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 1.2765/00 support area (previous low). 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 ST highs (1.3100 area) 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, for now the pair obviously lacks any directional momentum. EUR/USD remains locked in an ever tighter sideways trading pattern.
On Wednesday, Japanese markets were closed for the National foundation holiday. They traded stronger early in the session in the wake of the global market uncertainty after market disappointment on Geithner’s financial rescue plans. However, as tensions ease during the US trading hours, USD/JPY recouped the earlier losses and closed the session at 90.40, almost unchanged from the 90.47 close on Tuesday.
The Nikkei closed this morning’s session with a loss of 3%, but Japanese markets had some catching up to do after yesterday’s market holiday. The yen shows some limited gains against the dollar 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. The long-term trend in the pair remains negative, but the downtrend tends to slow 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 of last week, USD/JPY did break out of a short-term consolidation pattern. However, there were no followthrough gains yet. The market reaction to the Geithner plan on Tuesday even helped to yen to regain part of the recent losses. Nevertheless, we still have the impression that the underlying yen-momentum is not that strong. Over the previous days, we advocated that, if global market sentiment would become less risk averse, there might be room for a more pronounced rebound in USD/JPY and we installed a cautious buy-on-dips approach. Tuesday’s and Wednesday’s price action didn’t go our way, but for now we don’t change tactics yet. The 94.65 reaction high is the first high profile point of reference on the charts. The Stock market performance (S&P close to key support levels!) will of course remain the key driver from the yen cross rates.
On Wednesday, sterling traders again experienced a highly volatile trading session. Sterling came already under pressure at the start of trading in Europe and EUR/GBP revisited the 0.90 area before the UK labour market data. These data were better/ less worse than expected and this caused a temporary rebound in sterling. However, sterling strength was short-lived. In the inflation report, the BoE painted a grim picture of the UK economy. Inflation was seen remaining below the inflation target over the policy horizon. This opened the way for the bank to shift to a policy of quantitative easing already at the March meeting. This triggered a new sterling selling wave and EUR/GBP reached an intraday high in the 0.9030 area. However, there was no follow through price action and EUR/GBP settled in a tight range close to 0.90 for the remainder of the session. EUR/GBP closed the session at 0.8965, compared to 0.8878 on Tuesday.
Today, the UK calendar is empty.
At the start of 2009, EUR/GBP made a forceful correction after the spectacular gains in mid-December. EUR/GBP tried to recapture 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/LT point of view, we remain sterling skeptic. Yesterday’s BoE policy announcement (quantitative easing) justifies this bias, we think. Earlier this week, EUR/GBP tested the 0.8663 area (previous high profile high). However, the test was rejected. The pair even rebounded above the 0.8840 Neckline. This rebound calls off the short-term alert in EUR/GBP and makes the picture neutral again. In a day-to-day perspective, we slightly prefer a buy-on-dips approach.
