On Tuesday, EUR/USD eked out some handsome gains, as Bernanke’s comments on (unlikely) nationalization of banks injected a dose of much needed risk appetite in the markets, pushing equities and the euro up. In the European session, the euro again tried to rally and recoup part of Monday’s losses, but just like than the pair ran into resistance around noon (CET) followed by selling that erased virtually all of the morning gains. The eco news in Europe was mixed with surprisingly strong French consumer spending, but also another below consensus reading of the IFO that reached new cycle lows. However, the data were more or less ignored. The same applied for the US data, as crashing consumer confidence, weak Richmond Fed business confidence and an acceleration of the decline in house prices couldn’t support the euro. After US equities found their composure and moved higher, the EUR/USD pair stabilized at first before moving up when later in the session equities stormed ahead. The return of risk appetite clearly benefitted the euro as we have seen many times in recent times and the EUR/USD pair eventually closed the session at 1.2846, compared to 1.2694 on Monday evening.
Today, the eco calendar isn’t very enticing. The Existing Home sales in the US and the German Q4 GDP figures won’t be of utmost importance. Indeed, German annual GDP figures, already published, in fact included the Q4 GDP figures that now will be officially released. The outcome of -2.1% Q/Q was exactly in line with expectations. ECB Weber said that he didn’t oppose a possible bail-out of a euro zone member states which would face insurmountable financing problems. While this is intrinsically euro positive, it went a bit lost in the equity-induced trading of yesterday evening. Overnight EUR/USD remained close to yesterday’s closing levels.
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 fuelled a euro-negative sentiment. On top of that, the euro remained a gauge 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 continued to take advantage from its safe haven status. Since mid January, 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 market fear that the deepening of the crisis in Central and Eastern Europe might cause a new adverse loop for the European economy and its financial sector caused EUR/USD to drop below the 1.27 support area last 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 a key factor for EUR/USD trading. Yesterday’s EUR/USD rebound is an indication of a more USD cautious market attitude, but there is as of yet no convincing signal that EUR/USD is out of the negative trend. A rise above 1.31 would be constructive though.
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 brought the 1.2330 area again in the picture (2008 low). A break below the 1.2330 area would signal big trouble for the single currency. In a day-to-day perspective, yesterday’s swift correction to the earlier rebound only confirms the picture that the topside in EUR/USD is capped. Range trading in the 1.25/1.31 range looks the most viable scenario for now.
On Tuesday, USD/JPY continued to rally higher. The yen has apparently lost its safe haven status and when the USD/JPY pair moved through the important 94.63 resistance level and painted a bullish double bottom formation on the charts, technical buying pushed the pair higher during a good chunk of the trading session, leaving the pair at 96.64 in the close, up from the 94.61 close on Monday.
This morning, USD/JPY tries to make more headway on the back of dismal trade figures that were sobering for an export oriented economy like the Japanese one. A small positive was an increase in small business sentiment. The Asian equities do give a bit of a mixed picture and not fully embrace Wall Street’s rebound yesterday, even if the Nikkei is up 2.65%. However, as stated before, the yen has lost its safe haven status. USD/JPY has reverted to yesterday’s closing levels. We suspect the pair needs a breather following breathtaking gains of recent, but the longer term outlook of the dollar improved.
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 really spectacular, 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. Last week, we had a cautious buy-on-dip approach in this pair. On Friday, the pair came close our first short-term target (target 94.65, reaction high 94.38) and the nearing of this high profile resistance temporary slowed the recent up-move. However, the move above 94.65 cleared an important hurdle making us positive on USD/JPY with the eyecatching 100 level a target for the next few sessions.
