On Monday, EUR/USD developed a sideways trading pattern. The single currency felt some headwinds at the start of trading in Europe. Negative headlines in the press on the financial position of some EMU member states and mounting concerns in the economic and financial position in central and Eastern Europe put the euro under moderate pressure at the start of trading. However, there was no strong impetus to push the pair to the key 1.27 support area as US markets were closed and the European eco calendar was almost empty. EUR/USD recouped part of the early losses (despite quite some heavy losses on the European stock markets) and closed the session at 1.2801, compared to 1.2862 on Friday.
Overnight, risk aversion flared up again. A Moody’s report warned that the crisis in Emerging Europe will be more severe than elsewhere due to large imbalances and this put will the financial strength ratings of the banks that are active in the region under pressure. The report pulled the triggered for a sharp sell-off of the single currency EUR/USD tumbled the 1.2770 area to test bids in the 1.2640 area at the moment of writing.
Today, the US calendar contains the NY Empire State Manufacturing survey, the TIC data and the NAHB housing index. In Europe, the ZEW economic sentiment indicator is scheduled for release. The eco data are interesting, but we doubt whether they will be the key driver for trading. Price action on global markets and on the forex market in particular will be driven by the debate on the financial stability of some European member states and the debate of the contagion from central and Eastern Europe. In the US, attention will go to the recue plans for the automobile sector (GM and Chrysler). However, it is highly doubtful that debate on the US automobile sector will help to support global investor sentiment. There might also be quite some fall-out from the US measures on the European automobile sector. So, at the start of the day, the picture looks challenging for the single currency, to say the least.
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 continue to weigh 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 trading pattern is more or less in line with the picture painted on the major stock market indices. Longer-term, we think that the picture for the dollar is not unequivocally positive. However, the market clearly had/has a euro skeptic attitude and this feeling has intensified this week. So, the heat is on for the single currency.
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. Overnight, the pair finally dropped below this key area. This raises the red alert for the single currency and opens to way for return action to the 1.2330 area (2008 low).In a day-to-day perspective, we can’t but taking a euro negative approach. A break below the 1.2330 area would signal big trouble for the single currency.
On Friday, USD/JPY trading was an area of relative calm. The US markets were closed and most traders adopted a wait-and-see approach. However, it was again remarkable that yen didn’t gain any ground on the poor European stock market performance. USD/JPY closed the session at 91.73, compared to the 91.93 close on Friday.
There was also very interesting price action in Asia this morning. Asian/Japanese stocks are again in negative territory, but this is no help for the yen. On the contrary, USD/JPY gains almost one big figure. So, the safe haven status of the yen apparently shows some cracks. Negative domestic (eco and political) headlines might also start to play some role.
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 not 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-on-dips approach. We have to admit that improved risk aversion at this stage is not really a good explanation for the USD/JPY rebound. USD strength probably is a better one. Nevertheless, the ST technical picture continues to improve. A sustained break above the 92.42 resistance (previous high, currently under test) opens to way for our MT 94.65 target.
On Monday EUR/GBP experienced again a volatile trading session. The pair showed some intraday swings but global euro weakness also weighed on this pair. EUR/GBP drifted lower and set an intraday low in the 0.8925 area. At the end of the trading session, a series of headlines from BoE’s Bean flashed on the screens. On sterling, the Deputy Governor said that markets may have gone too far in selling sterling, but that the general direction has been the right one. The depreciation of sterling is needed for rebalancing.
Today, the UK calendar is contains the CPI. The figure is interesting. However, after last week’s BoE assessment on inflation in the quarterly inflation report the market reaction to the release should be subdued. Later in the session BoE’s Besley will comment on the global economic crisis.
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 and the pair rebounded above the 0.8840 Neckline. This rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. Over the previous sessions we advocated that the EUR/GBP rebound lost momentum and that 0.9085/0.9130 could turn out to be a difficult hurdle short-term. The poor global euro sentiment might become a factor for EUR/GBP trading too. So, in a day-to-day perspective, we put the risk for some further losses in this pair.
