On Thursday, EUR/USD experienced again a very volatile trading session. Two selling waves (one at the start of trading in Europe, a second one early in US trading) hammered the single currency and EUR/USD came within striking distance of the early February lows. A new pop-up of global risk aversion was the driver behind the price action. The (US and European) data at best were an excuse to ‘explain’ the move. The same applies to the ongoing decline in the (US) oil price. However, the test of the key 1.27 area didn’t succeed as the stock market sell-off shifted into a lower gear. Later in US trading, rumours on a plan to support US homeowners even helped stocks to close almost unchanged. EUR/USD also regained most of the early losses. The pair closed the session at 1.2861, again not that far from the 1.2906 close on Wednesday. So, risk appetite/risk aversion play a role in the intraday price action but in a broader perspective, EUR/USD still develops a rather ‘boring’ sideways trading pattern.
Today, euro zone Q4 preliminary GDP data will be published. The figure will receive a lot of attention in the media, but from a market point of view it won’t bring much new info. In the US, the Michigan consumer confidence will be published. The currency markets will also give some attention to the G7 meeting that will be held in Rome today and tomorrow.
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 continues to be a pointer of global risk aversion. Negative headlines on the development of the credit crisis often had a (albeit moderate) 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, the market clearly has a euro skeptic attitude. Even factors that could be seen as euro supportive (narrowing intra euro government bond spreads, tentative sings of improvement in global sentiment) until now were not able to support the euro. So, EUR/USD holds close to the bottom of the recent sideways range, but after all, the indecisive EUR/USD trading pattern remains in place. Let’s call it a balance of uncertainties
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 rebounds were 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 Thursday, USD/JPY trading joined the boarder market theme of risk aversion. However, the yen gains were again far from impressive. USD/JPY set and intraday low in the 89.85 area before noon in Europe, but performed quite a decent rebound later in the session. USD/JPY even closed the day higher in a daily basis (90.94 compared to 90.40 on Wednesday). So, at least for now, the safe haven attractiveness of the yen is not that overwhelming anymore.
This morning, the Nikkei (and most other Asian stock markets) closed the session with decent gains. The focus, especially for the Asian currencies, is on the G7 meeting. Protectionism will be a prominent feature on the agenda. On the currencies one shouldn’t expect high profile statements. Everyone wants a weaker currency and the statement will probably contain a phrase that statement that excessive exchange rate moves are undesirable.
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). Last week, USD/JPY did break out of a short-term consolidation pattern. There were no follow-through gains yet. 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 Thursday, EUR/GBP trading developed again in very nervous market conditions. Sterling faced follow-through selling on Wednesday’s BoE indications that the bank is preparing steps of quantitative easing. EUR/GBP reached highs in the 0.9072 area. Later in the session, profit taking on sterling shorts and global euro weakness triggered a rather sharp EUR/GBP correction. Nevertheless, EUR/GBP still closed the day higher at 0.9166, compared to 0.8965 on Wednesday.
Today, the UK calendar is empty. Over the previous months, there were some signs of unease of some European policy makers with the weakness of sterling. However, we don’t expect this theme to pup up in the external communication after the meeting.
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 even temporary dropped below the key 0.8840/00 neckline/support area. This was an important warning signal but the there was no sustained follow through price action. From a fundamental/LT point of view, we remain sterling skeptic. The BoE policy announcement on quantitative easing still justifies this bias, we think. Earlier this week, EUR/GBP tested the next high profile support (0.8663 area previous high) but 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, it looks as if the EUR/GBP rebound is losing momentum.
