On Monday, EUR/USD extended the gains from last week and the pair even regained a first important technical barrier as it broke above the 1.2991 previous high. A strong performance of the stock markets in Europe and in the US was the most obvious driver behind the move. Improved risk appetite again proved to be an important support for the euro pair. Aside from the stock market performance, there were no obvious news facts to explain the move. The (US) data (NY empire state survey, the TIC data and the industrial production) were weak, but were again largely ignored by all markets. One might also presume some investor inclination to scale back dollar long exposure ahead of the Fed monetary policy decision that will be announced tomorrow and the US plan to address the problem of banks’ toxic assets that is expected to be unveiled later this week. US stocks faced a setback later in the session and this caused EUR/USD to give back part of the earlier gains. EUR/USD closed the session at 1.2968 compared to 1.2928 on Friday. In a speech, ECB’s Tichet said the bank will ensure that Europe could rely on the ECB to preserve the euro as an anchor of stability. However, we don’t see any immediate impact from this statement on the day-to-day price action.
Overnight, EUR/USD held up rather well as Asian stock market showed remarkable resilience despite the correction in the US yesterday evening. EUR/USD is being traded in the 1.30 area.
Today, the calendar heats up with the ZEW economic sentiment indicator in Europe. In the US the PPI, housing starts and building permits are scheduled for release. Producer prices are not really a big item for the markets and the ZEW and US housing data are expected to show a further decline. As was the case recently, any market reaction to these data should occur via the stock market reaction. We have the impression that markets tend to be a bit more clement in case of negative figures. In this context it would be interesting to see whether there is any positive market reaction on the stock markets and on EUR/USD in case the data were to come out better, less negative than expected. In the financial press, there will also be a lot of speculation on the outcome of tomorrow’s Fed policy decision (to buy or not to buy long-term treasuries) and on the Toxic asset plan that US Treasury Secretary Geithner is expected to publish later this week. The uncertainty on these items might still be a slightly USD negative in day to day perspective.
Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis. The deterioration of the European government finances and the widening intra-government spreads was seen as an illustration of intra EMU tensions. In 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. The US side of the story has also been far from brilliant, but the dollar took advantage from its safe haven status. So global bad news most often was a negative for the euro, good news gave the single currency some downside protection. Over the previous weeks, the EUR/USD decline shifted into a lower gear but until now any attempt of the euro to regain ground ran rapidly into resistance. Recently, we indicated that a sustained change in the global sentiment would be needed to give the euro better downside protection. The price action over the previous 10 days on the stock markets showed tentative signs that global markets have entered calmer waters and that there is even room for a (ST? technical?) correction, supporting the single currency. If this pattern would be confirmed this week, the euro might continue its gradual upward correction of late. Short-term we still slightly prefer a buy-on-dips approach with 1.3330 range top the next target on the charts.
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 set a ST low in the 1.2457 area, but a test of the key 1.2330 area didn’t occur. Last week, the pair regained the 1.2754 previous ST high and STMA and MTMA (averages) turned to the upside. Over the last 24 hours the pair extensively tested the 1.2991 resistance (previous high). A break above this level would open the way to the top of the sideways range in the 1.3330 area.
On Monday, USD/JPY basically developed a sideways trading pattern in the 98.00/98.65 area. The ongoing positive sentiment on the stock markets kept the previous safe haven currencies in balance. However, any dips in the pair apparently attracted new bids keeping the downside in the pair rather well protected. Buying in other yen cross rates (EUR/JPY, GBP/JPY) probably also filtered through onto this pair. US/DJPY closed the session at 98.18 compared to 97.95 on Friday.
This morning, the tertiary industry index surprised on the upside. Asian/Japanese stocks posted a strong performance despite the late profit taking in the US. USD/JPY is again well bid this morning.
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 the 90.00 area. Since mid January, the pair even made a decent rebound that accelerated. 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. Last month, we installed a buy-on-dips approach in this pair. The break above the key 94.65 resistance improved the ST picture further. Last week, the USD/JPY rebound lost momentum, opening the way for a corrective profit taking move. Next important resistance still comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). We turned neutral on USD/JPY as we have the impression that this resistance area will be tough to break in a first attempt. We hold on to a range trading strategy between 94.65 (neckline double bottom) and 100.55/102.20.
On Monday, it looked as if sterling would be the major beneficiary from the improving global market sentiment. The UK currency started the new trading week on a strong footing and posted strong gains against the euro and even more against the dollar. Cable spiked above the 1.42 area and EUR/GBP temporary revisited the 0.9150 area. However, the gains could not be sustained and EUR/GBP closed the session at 0.9220, not that far away from the 0.9240 close on Friday.
Today, the UK calendar is again thin with only the DCLG house prices on the agenda. However, as there is an inflation of UK house price statistics one can raise the question whether they have much added value for markets after the recent publications.
Global Medium term context. At the start of 2009, EUR/GBP made a forceful correction after the steep sterling losses mid-December. A first rebound ran into resistance in the 0.95 area. Another forceful correction 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 as we consider the BoE approach a potential risk factor for sterling. This was also visible after the latest BoE meeting. The Bank of England taking ever more aggressive steps in its quantitative easing policy and the growing government involvement in the financial sector received again more market attention and had a negative impact on sterling. The break above the 0.9083/72 neckline made the MT technical picture for EUR/GBP again positive. Since the end of last week, the EUR/GBP rebound shifted into a lower gear. However, the pair holds quite easily above the 0.9072 neckline. For now, we maintain our buy-on-dips approach. The 0.9519 reaction high is the next high profile resistance on the charts. Sustained return action below the 0.9085/72 support (previous high) would be an indication that the sterling negative market attitude is waning.
