On Friday, EUR/USD again basically held a sideways trading pattern. However, with global markets still under the influence of a negative investor sentiment, the bias for EUR/USD, if any, was slightly downwardly oriented. Poor EMU GDP data and a disappointing US consumer confidence capped the upside in EUR/USD. The upcoming G7 meeting also prevented big position taking in the major cross rates. The pair closed the session at 1.2862, almost unchanged from the 1.2861 close in Thursday.
At the G7 meeting, member state leaders repeated that excess volatility and dis orderly movements in exchange rates have adverse implications for economic and financial stability. They welcomed China’s fiscal measures and continued commitment to move to a more flexible exchange rate system. The yen and sterling weren’t mentioned in the official communiqué.
Today, the US and European calendar are empty. However, in the UK financial press there are a lot of negative headlines on the banking sector and on the potential risk for additional problems for EMU countries with a big banking sector relative to their GDP. Especially Ireland comes again in the picture. If the theme would become again more important for global trading, it could put intra-EMU government bonds spreads under more upward pressure and this is not a favourable context for the euro. Markets will also continue to take a close look at the implementation/ specifications of the US plans. The measures to address the crisis in the auto sector (GM and Chrysler tomorrow) might also have an impact on global sentiment and thus on EURM/USD trading.
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 takes 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 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. At the start of the new week, the headlines in the financial prices are again far from optimistic. This weighs on the euro this morning.
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. For now, EUR/USD still holds established trading range. However, we have the feeling that EUR/USD picture is becoming again heavier. So; a test of the downside becomes ever more probable, we think.
On Friday, USD/JPY was remarkably well bid. The pair traded in the 91.00 area at the start of trading in European and extended its rebound throughout the session, even if sentiment on most other markets was not really that euphoric. Some repositioning ahead of the G7 seven meeting might have played a role. USD/JPY closed the session at 91.93, compared to 90.94 on Thursday.
As mentioned, the G7 meeting didn’t give an explicit reference to the yen. So, the yen initially regained some ground over the weekend. This morning the focus was on the Japanese eco data. Japanese Q4 GDP contracted with an astonishing 3.3% Q/Q. The global slowdown leaves deep traces on the Japanese economy. The reaction on the Nikkei was moderate (a loss of 0.38%). USD/JPY holds up rather well with pair trading in the 91.75 area at the moment of writing.
Looking at the charts, USD/JPY set a reaction low in the 87.15 area in December. 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). Recently, the pair even tried to make a cautious step higher. The gains were far from impressive, but we still have the impression that the underlying yen-momentum is not that strong. Last week, 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-ondips approach. Global market sentiment remains fragile, but for USD/JPY holds above the 90.75/91.30 previous highs. We’re not overly enthusiastic, but for now maintain our cautious yen positive bias. A break above the 92.42 reaction high would improve the ST picture further and could bring the 94.65 reaction high again in the picture.
On Friday, EUR/GBP experienced again a very volatile trading session. Early in the session, global euro weakness and maybe also a scaling back of sterling shortexposure ahead of the G7 meeting (some feared a statement on the weak pound) pushed EUR/GBP to the 0.8830/50 area during the morning session in Europe. However, the tide turned in the afternoon. New negative headlines in the UK financial system (Lloyds/HBOS) changed the sentiment on sterling again. EUR/GBP closed the session at 0.8963, compared to 0.9017 on Thursday.
This morning, the UK Rightmove house prices came out at 1.2%M/M/-9.1% Y/Y. Sterling was not mentioned in the G7 communiqué. So, there was no formal ‘warning’ on the sterling decline. UK Finance Minister Alistair Darling said sterling was not discussed during the meeting. However, European policy makers probably still are not really happy with the sterling decline.
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 there was no sustained follow through price action. From a fundamental/LT point of view, we remain sterling cautious. The BoE policy announcement on quantitative easing justifies this bias, we think. Ongoing pressure on the banking sector is no help for sterling either. Last week, EUR/GBP tested the high profile support (0.8663 area previous high) but the test was rejected. The pair even rebounded above the 0.8840 Neckline. This rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. In a day-day perspective, we start the week with a neutral bias for EUR/GBP. The 0.9085/0.9130 area looks a difficult hurdle short-term. Global euro sentiment remains very fragile, too. So both components of the EUR/GBP pair might find some balance of weakness short-term.
