On Wednesday, EUR/USD fell rather sharply in (illiquid) Asian markets and dropped to a new medium term reaction low on the 1.2460 area. However, improved global investor sentiment pulled the trigger for a gradual rebound in the pair throughout the session. The poor European services PMI (39.2, cycle low) and the awful US ADP labour market report had no lasting impact on EUR/USD trading. Stocks were the main driver and as US stock markets this time managed on to preserve most of their gains, EUR/USD closed the session of 1.2661, compared to 1.2561 on Tuesday.
Overnight EUR/USD is traded slightly lower compared to yesterday’s close. Asian stock markets showed a mixed picture and investors apparently take a wait-and-see approach ahead of the ECB interest rate decision.
Today, the eco calendar contains a revision of the Q4 EMU GDP data, the US productivity data, the jobless claims and the factory orders. However, the key feature for markets will be the ECB interest rate decision and press conference. A 50 basis points rate cut is widely expected and shouldn’t come as a surprise for the markets. However, in the press conference, ECB’s Trichet will face a whole range of questions on how the Bank’s policy response (in cooperation with other EU policy levels) to address the financial and economic crisis. Already for quite some time, the market holds a euro skeptic view. The EU way of handling the crisis is seen as not aggressive enough, compared to big plans that are put in place in the US (and to a lesser extent in the UK). We are not convinced that the more gradual European/ECB approach is much worse, but this obviously is not the markets’ assessment. So, if Mr. Trichet holds a cautious approach, for example on steps towards quantitative easing, this might again trigger some euro disappointment.
Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis and less flexible in addressing the fallout from the financial turmoil. The deterioration of the European government finances and the widening intra-government spreads was seen as illustration of intra EMU tensions and fuelled the euro-negative sentiment. On top of that, the euro remained a gauge of global risk aversion. The US story has also been far from brilliant, but the dollar took advantage from its safe haven status. Since mid January, the EUR/USD decline shifted into a lower gear but any attempt of the euro to regain ground immediately ran into resistance. Mid February, market fears 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. This illustrated to euro skeptic sentiment. A change in the global negative sentiment is needed to give the euro some better downside protection. At least for, we don’t see such a trigger available. By default, the gradually euro downtrend 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 brought the 1.2330 area again in the picture (2008 low). A break below the 1.2330 area would signal more trouble for the single currency.
On Wednesday; USD/JPY remained well bid. The positive open on the European stock markets triggered in both EUR/JPY and USD/JPY. USD/JPY broke above last week’s high and this reinforced the move. The pair reached a new reaction high in the 99.50 area. Later in the session the pair settled in a sideways trading pattern closed the session at 99.15, compared to 98.16 on Tuesday.
This morning, the weaker than expected capital spending data put the severe Japanese economic decline again in the picture. The yen lost again some ground after the publication of the data. The Nikkei holds up rather well despite a less convincing performance on most other Asian stock markets.
Global context. 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 decent rebound that accelerated over the previous two weeks. The underlying yen-momentum obviously has weakened. The yen decline was not driven by improved market risk appetite, but by rising worries on the Japanese economy. Over the last two weeks, we installed a buy-on-dip approach in this pair. The break above the key 94.65 resistance improved the ST picture further. The next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). For now we hold on to our USD/JPY positive bias.
On Wednesday, sterling recorded some cautious gains against the euro. The improvement in global (financial and economic) sentiment supported the UK, especially during the morning session. The moderate improvement in UK services PMI (while the euro-zone measure set a new cycle low) might have played a (minor) role, too. However, EUR/GBP trading was technically driven and GBP investors basically were in a wait-and-see mode a of today’s BoE and ECB meeting. Later in the session, EUR/GBP recouped most of the earlier losses (in step with EUR/USD). EUR/GBP closed the session at 0.8921, compared to 0.8941.
Today could be an important day for all UK/GBP markets. The Bank of England meets to decide on interest rates. The majority in the markets expects a 50 basis points rate cut to 0.50%. However, at its previous meeting the BoE already discussed the potential side effects of too low interest rates. Next to the interest rate decision, the expected/potential announcement on the implementation of a policy of quantitative easing might be even more important. Markets expect the BoE and/or the Treasury to announce a framework for quantitative easing anytime soon. In theory, an aggressive quantitative easing is no good news for the currency, especially not if monetary authorities from the major reference currency (the euro) are reluctant to walk the same road. However, these theoretical considerations recently had no big impact on currency trading. This applies to sterling, but also to the US dollar. Whatever, the outcome, this might become a very interesting day on all markets.
Global Medium term context. At the start of 2009, EUR/GBP made a forceful correction after the steep gains mid-December. A first rebound ran into resistance in the 0.95 area and another forceful correction even caused the pair to test 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 made the picture neutral again. From a fundamental/LT point of view, we remain sterling cautious. Recently the 0.9085/0.9130 resistance area turned out to be a difficult hurdle short-term. In a day-to-day perspective, we remain neutral for EUR/GBP and wait for a technical signal. ST trading is confined in the 0.8638/0.9072 trading range. There are some tentative signs that the bottom in the pair becomes a bit better protected, but we don’t want to font-run on this as long has we don’t get a clear technical signal.
