On Tuesday, trading in the major currency cross rates was locked in rather tight ranges. Nevertheless, underlying sentiment was still constructive for the non-safe haven currencies, including the euro. Over the previous days, the price action on the stock markets was the most important single driver for price action on almost all other markets. At the start of trading in Europe, stocks found no clear direction and this also filtered through in EUR/USD trading. The EUR/USD rebound ran into resistance and pair settled in close to the 1.30 barrier. In line with recent market behaviour, the eco data (better than expected ZEW sentiment and later in the session a rebound in US housing starts and building permits) had again no impact on trading. Later in the session US equities resumed their uptrend and this helped EUR/USD to regain the 1.30 barrier. EUR/USD closed the session at 1.3017, compared to 1.2968.
Overnight, further cautious gains on most Asian stock markets continues to support the EUR/USD cross rate.
Today, the calendar contains some second tier European data. In the US, the CPI is scheduled for release. Recently some price indicators in the US and Europe were not as soft as one could have expected in the current economic environment. So, the deflation threat might be less than anticipated. Until now this was not really an issue for markets. Stocks will remain in the driver’s seat. However, one can expect some investor caution going into the Fed policy announcement. Regarding the latter, markets will focus on indications for additional measures of quantitative easing. We don’t expect the Fed to make an ‘unequivocal’ announcement on the outright buying of US Treasuries. However, any hints in that direction might still have some impact on currency markets. Recall that the latest step of the BoE towards quantitative easy put quite some pressure on sterling.
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 global sentiment would be needed to give the euro better downside protection. The price action on global stock markets over the previous 10 days 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. On top of that, the spreads between (most) EMU government bonds recently tended to turn somewhat tighter and this might be a euro supportive factor too. In a speech yesterday, Mr. Trichet also firmly dismissed any speculation on intra-EMU disintegration. If this pattern would be confirmed going forward, the euro might continue its gradual upward correction of late. Short-term we still maintain 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 48 hours the pair extensively tested the 1.2991 resistance (previous high). The jury is still out on this test, but sustained trading above this level would open the way to the top of the sideways range in the 1.3330 area.
On Tuesday, USD/JPY extended its gradual rebound. The drivers were the same as during previous trading sessions. An overall constructive stock market sentiment, buying in other yen cross rates (especially EUR/JPY) and some yen caution ahead of the BOJ meeting all kept the Japanese currency in the defensive. Nevertheless, the yen losses against the dollar were not really excessive. USD/JPY closed the session at 98.60, compared to 98.18 on Monday.
This morning all eyes were on the BOJ policy meeting. The bank left its policy rate unchanged at 0.1%, but said it would increase purchases of government bonds. Independent of this BOJ move, there government parties are mulling additional fiscal stimulus. Even as there is no direct link between the two initiatives, there might by some interdependence. Japanese stocks showed only limited gains this morning (0.29%). The yen records some limited gains.
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 in February. 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. 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 Tuesday, the swings in EUR/GBP and cable were far from spectacular. However, the least one can say is that sterling was again not rally in good shape. The tentative rebound on Monday was soon aborted. The softer stock market sentiment early in the session (less risk appetite) was a good reason to explain yesterday’s soft sterling performance. However, putting things in a broader perspective, one can only conclude that sterling still continues to feel the negative fall-out from the latest BoE policy steps in its QE set-up. Even last week’s strong stock market rebound and rise in global risk appetite was not able to turn fortunes for the UK currency. As said, the changes in EUR/GBP and cable were not really that big, but yesterday’s price action only reinforced our feeling that the trigger for a sustained sterling rebound is not around the corner. EUR/GBP closed the session at 0.9269, compared to a 0.9220 close on Monday.
Today, the UK labour market data and the BoE inflation report are scheduled for release. Recently, the BoE minutes often were interesting literature. However, after the new policy framework that was set out in cooperation with the Treasury, we don’t expect much high profile new info from the Minutes. Of course, you never know. Regarding the labour market data, we wouldn’t be surprised to see some intraday sterling weakness in case of a weaker than expected figure.
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 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 held quite easily above the 0.9072 neckline. For now, we maintain our buy-on-dips approach. The 0.9320 reaction high is the first intermediate resistance. A break above this level opens the way for return action to the important 0.9519 reaction high. Sustained return action below the 0.9085/72 support (previous high) would be an indication that the sterling negative market attitude is waning.
