On Wednesday, the EUR/USD price action entered calmer waters after the steep losses on Tuesday. However, underlying market sentiment was still euro skeptic. The EUR/USD pair tried to move higher at the start of trading in Europe. However, the ongoing focus on intra-EMU tensions and fear for a potential backfire from the growing economic and financial tensions in East and Central Europe continued to pressure the single currency. The headlines on the new US housing plan gave only very limited and temporary support to the stock markets and it was also no help for the risk-sensitive euro. The US data (IP and housing data) were weak but had no impact on EUR/USD trading. The pair reached new lows in the 1.2515 area and closed the session at 1.2530 compared to 1.2582 on Tuesday.
After the European close, Fed’s Bernanke gave a speech on the Fed’s lending programs and its Balance sheet. The Fed president spoke about the whole range of problems of the Fed but his insights brought no high profile news for the (currency) markets. The same was the case for the Fed minutes of the previous meeting.
Today, eco calendar contains US produces prices, the jobless claims, the leading indicators and the Philly Fed survey. In Europe, only some second tier eco data are on the calendar. However, global market sentiment will continue to set the tone for trading. The (easing of?) tensions in the European financial system and some deeper analysis of the US housing plan might still yield some interesting (positive?) insights. With respect to the first item, there are some press headlines this morning from the World Bank, advocating more coordinated support for Central and Eastern Europe. If markets would get more signs that actions to address this problem are being prepared, this might ease some of the global pressure on the European asset markets and, to some extent, also on the single currency. Of course, for now this is nothing more than a working hypothesis.
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 continued 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 global crisis most often had a 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 renewed flaring up of risk aversion and the market fear that the deepening of the crisis in Central and Eastern might cause an new adverse loop for the European economy and its financial sector caused EUR/USD drop below the 1.27 support area earlier this week. The price action in EUR/USD is very much driven by global market sentiment and with major stock market indices still close to key support levels (we especially look at the S&P 500), the outcome of this test will also be the key factor for EUR/USD trading. EUR/USD is expected to remain on the defensive as long as global market uncertainty persists.
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 tested several times the 1.2765/00 support area (previous low) and a break of this area succeeded on Tuesday. This raised the red alert for the single currency and opened to way for return action to the 1.2330 area (2008 low). A break below the 1.2330 area would signal big trouble for the single currency. In a day to day perspective, we have the impression that the EUR/USD decline might shift into a lower gear after the recent (rather steep) losses.
On Wednesday, USD/JPY extended the rebound from the previous sessions. The trend wwas already visible in Europe, but accelerated during the US trading hours. Some headlines on the financial newswires linked the move to the Obama housing plan. This might have been part of the explanation. However, the cautious reaction to the plan on the stock markets raises some questions on this analysis. We have the impression that yen weakness is becoming a factor of growing importance, too. USD/JPY closed the session at 93.79, compared to 92.41 on Tuesday.
This morning, the BOJ left is policy rate unchanged at 0.1%. The bank also announced/ prolonged measures to support corporate funding. Asian/Japanese stocks mostly started cautiously higher this morning.
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 ran out of steam below 0.9000 area (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 rebound. The gains are not impressive, but the underlying yen-momentum obviously has become less 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 and even more yen weakness due to the steep deterioration in the Japanese eco situation probably are better ones. Nevertheless, the ST technical picture remains constructive. The break above the 92.42 resistance (previous high) opened to way for our MT 94.65 target.
On Wednesday, the UK Minutes were the key event for trading in sterling. Sterling traded nervously ahead of the Minutes and EUR/GBP spiked higher from the 0.8830 to the 0.8920 area. However, the tide turned after the publication. The report contained no high profile new info on the level sterling. However, the report revealed an interesting internal debate on the adequacy of additional (big) cuts of the base rate. The bank suggested that a base rate close to zero could also have adverse consequences for the price setting in the banking sector. We don’t go that far to conclude that the bank won’t cut the base rate anymore, but from now on the focus will be on additional steps in quantitative easing. Whatever the conclusion of this debate, shortterm UK interest rates went substantially higher and this might have supported the rebound in sterling in a day perspective. EUR/GBP continued to drift south throughout the session. Global euro skepticism probably played a role, too. The pair closed the session at 0.8818, compared to 0.8837 on Tuesday.
Today, the UK calendar contains the Public finance data and the Money supply data. Usually those data are no market mover for the currency market. However, in the current environment we would keep a close eye on the UK budget data. A steep deterioration of the UK budget situation could raise some markets doubts (cf; the rather steep rise in the UK CDS spread recently). We are keen the see the reaction of sterling in case of poor budget data.
At the start of 2009, EUR/GBP made a forceful correction after the spectacular gains mid-December. EUR/GBP tried to recapture the longstanding uptrend, but the rebound ran into resistance in the 0.95 area and another forceful correction even sent the pair (temporary) 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 subsequent rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. Over the previous sessions we advocated that 0.9085/0.9130 could turn out to be a difficult hurdle short-term. The poor global euro sentiment currently weighed on EUR/GBP trading too. In a day-to-day approach (in line with EUR/USD) we now have the impressing that the downside in this pair might become less easy.
