On Thursday, EUR/USD rebounded, trying to reverse at least part of its losses earlier this week. An (albeit limited) easing of global market tensions triggered some profit taking on recent EUR/USD shorts. Pleadings from the World Bank to take coordinated action to support the economies and East and Central Europe might have been a supportive factor, too. EUR/USD in two waves rebounded from levels below 1.26 to test offers in the 1.2750 area early in US trading. Markets at that time also looked out for a joined press conference of German Chancellor Merkel and EU’s Barroso. However, Merkel was very vague on any support Germany was prepared to give if another Euro-zone country would have financing difficulties. On the help from eastern European countries, the German Chancellor indicated that any such help should primarily go via the IMF. This was a disappointment from a euro point of view. On top of that, US stock markets failed to hold on to early session gains and drifted into the red later in the session, dragging the risk-sensitive euro lower, too. EUR/USD closed the session at 1.2674, compared to 1.2530 on Wednesday. Overnight, the steep decline in US bank stocks and additional losses on the Asian stock markets drive EUR/USD further south, reversing the remainder of yesterday’s gain
Today, eco calendar contains the first estimate of the European PMI’s. They are expected to stabilize at a low level. In the US the CPI is scheduled for release. However, the debate on the intra-EMU/EU support will remain an important driver for the single currency. The declarations from German Chancellor Merkel yesterday were a bit disappointing. However, looking at it from a positive angle, it is good news that the debate on European support has stated. In this context, France Finance Minister Lagarde indicated that eurozone countries should try to find solutions without seeking the help from the IMF. In the same context, it was remarkable that the spreads of some hard hit countries like Ireland narrowed quite substantially yesterday. As usually in Europe, this process probably won’t go fast, but we put it on our checklist as a potential factor of importance for EUR/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 continued to weigh on the single currency. The euro remains a pointer of global risk aversion. Negative headlines on the development of the global crisis often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar takes advantage from its safe haven status. Recently, 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 Europe 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 the break of this area deteriorated the picture 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. Yesterday, the EUR/USD decline temporary drifted into a lower gear. However, this euro resilience apparently was again shortlived. In a day-to-day perspective, renewed stock market losses don’t bode well for the EUR/USD performance today.
On Wednesday, USD/JPY extended its gradual rebound. There was no high profile news to support the move, but rising concerns on the health of the Japanese economy become an ever important factor for the yen. Poor US data were no help for the yen anymore. USD/JPY closed session at 94.20, compared to 93.79 on Wednesday.
This morning, Japanese eco data brought no big surprises. The Topix stock market index posted the lowest close since January 1984. Former vice Finance Minister for international Affairs Sakakibara (Mr. Yen) was quoted that the yen could fall to 100 in the days ahead as the Japanese economy is nearing recession.
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 made a gradual rebound. The gains are not impressive, but the underlying yen-momentum obviously has weakened. This time, the yen decline was not driven by improved market risk appetite, but by rising worries on the Japanese economy. Since the end of last week, we have a cautious buy-on-dip approach in this pair. We hold on to that bias. The ST technical picture remains constructive. The break above the 92.42 resistance (previous high) opened to way for our MT 94.65 target. The nearing of this high profile resistance might temporary slow the recent up-move.
On Thursday, EUR/GBP showed some intraday swings, but at the end of the day, the absolute change was not that big. This is a bit remarkable as there were data (and even more press headlines) on the deterioration of the budgetary and debt situation in the UK. The rescue measures/nationalization of (parts) of the banking sector will cause a sharp rise in the UK net debt. This is to some extent a ‘technical’ matter, but we take a close look whether rising debt/UK credit quality might become a factor of importance for the UK currency. EUR/GBP briefly dropped below the 0.8800 barrier early in European trading, but recouped the losses later in the session, due the UK budget debate and the overall better euro sentiment. EUR/GBP closed the session at 0.8866, compared to 0.8818 on Wednesday.
Today, the UK retail sales are scheduled for release. Recently, various measures of UK retail sales often painted a very different picture. We don’t have a strong view on the outcome of the figure but we’re not overly confident that the UK currency will be able to bear much additional bad news, if it where to occur.
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. 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. From a fundamental/LT point of view, we remain sterling cautious. Over the previous sessions we advocated that the 0.9085/0.9130 area could turn out to be a difficult hurdle short-term. In a day-to-day perspective, we are neutral for EUR/GBP and wait for a technical signal. ST trading is confined in the 0.8638/0.9072 trading range.
