On Tuesday, investors focused on the overall improvement in global market sentiment. This comeback of risk appetite had also some impact on the currency market in general and on EUR/USD in particular. However, at the end of the day, the EUR/USD performance can only be seen as disappointing. EUR/USD started the session with a positive bias. Later in the session, the positive headlines on Citi group temporary propelled EUR/USD above the 1.28 mark. However, despite a ongoing good stock market performance, the single currency could not hold on to its early gains. Rather soft headlines from ECB’s Weber might have played a role. Nevertheless, EUR/USD declined further after the European close. The pair closed the session at 1.2682, compared to 1.2611 on Monday.
Overnight, EUR/USD tried to move higher again on the positive stock market sentiment, but the pair faced again a set back on the publication of poor Chinese trade balance figures as these questioned the viability of the recent market optimism.
Today, the calendar contains German factory orders. In the US, only some second tier data are scheduled for release. So, global (stock) market sentiment and technical factors will most probably be again the most important factors for EUR/USD trading. After yesterday’s strong gains, it will be interesting to see whether stocks can maintain their constructive bias or whether yesterday’s rebound was a short-lived shortcovering rally. We would be surprised to see the rebound continuing today at the same pace. In a daily perspective, such a scenario would also cap the upside in EUR/USD.
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 an illustration of the 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 the euro skeptic sentiment. A sustained change in the global negative sentiment is needed to give the euro some better downside protection. As long as this context persists, a sustained euro rebound is not evident. Yesterday’s, euro price action only confirms that a big rebound in EUR/USD is not that evident, even in case of a temporary improvement in investor risk appetite. Nevertheless, we have the impression that the downside in the pair has become better protected (no new ST low at the end of last week).
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 ST 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. For now this is not our preferred scenario. We remain neutral short-term. Range trading in the 1.2457/1.2992 range is preferred. Yesterday’s failure to sustain above the 1.2754 reaction high only confirms the feeling that any euro rebound will be very gradual.
On Tuesday, USD/JPY showed some intraday volatility, but at the end of the day, the broader picture in this pair hasn’t changed. USD/JPY ceded some ground early in the session in line with other USD cross rates as global markets turned less pessimistic. However, the dollar already managed to regain most of the early decline (despite ongoing stock market gains) and the pair closed the session at 98.67, compared to 98.84 at the close on Monday.
This morning, Japanese machine orders declined -3.2 M/M and -39.5 % Y/Y, but were slightly less gloomy than expected. Corporate goods prices declined slightly less than expected too. The Nikkei joined the rebound on the global stock markets and closed the session with a gain of 4.55%. However, this had no impact on yentrading. USD/JPY showed a brief up-tick on the poor Chinese trade data, but basically the pair shows no clear trend this morning. A finance ministry official indicated that currencies won’t be a big topic at the early April G20 meeting.
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 90.00 area. Recently, the pair even made a decent rebound that accelerated over the previous two weeks. The underlying yen-momentum obviously has weakened. The market questioned the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy as faltering exports clouded the eco picture. Over the last two weeks, we had a buy-on-dips approach in this pair. The break above the key 94.65 resistance improved the ST picture further. At the end of last week, the USD/JPY rebound lost momentum, but the correction was short-lived. Next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). We turn neutral on USD/JPY as we have the impression that this resistance area will be tough to break in a first attempt. A decline below 96.50 would deteriorate the picture (stop loss protection on longs).
On Tuesday, EUR/GBP extended the rebound from the previous sessions. From a fundamental point of view, yesterday’s price action was a bit strange. Monday’s sterling sell-off was driven by negative headlines on the UK banking sector. Yesterday, this sector staged quite an impressive rebound but this was no help for sterling. On the contrary, EUR/GBP (in step with EUR/USD) spiked higher on the Citi group headlines. Earlier in the session, the UK production data came out poor and below market consensus, but at that time this left no traces on the EUR/GBP charts. So, yesterday’s EUR/GBP gain should in the first place be considered as follow-through price action on the technical break above 0.9085. EUR/GBP closed the session at 0.9223, compared to 0.9153.
Overnight, the NIESR GDP estimate declined -1.8 %. The impact on EUR/GBP trading was limited. Nevertheless, the pair is holding close to thee recent highs.
Later today to UK trade balance data are on the agenda. Markets will also take a close look at the BoE starting the implementation of its policy quantitative easing (buying assets).
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 remained sterling cautious. Until the end of last week, sterling weathered the quantitative easing debate rather well. However, the BoE taking an ever more aggressive approach in its quantitative easing and the growing government involvement in the financial sector apparently get more market attention and have a negative impact on sterling. Over the precious sessions EUR/GBP moved above a downtrend line from the highs and on pair also cleared the more important 0.9085/9130 area, making the technical picture positive for now. In a day-to-day perspective, the EUR/GBP rebound might shift into a lower gear. Nevertheless, we maintain our buy-on-dips approach. The 0.9519 reaction high is the next high profile resistance on the charts.
