On Wednesday, EUR/USD continued to be well bid already from the start of trading in Europe. At that time, the euro performance could still be linked to the ongoing rebound on stock markets. However, (European) stocks could not hold on to their initial gains. Nevertheless, EUR/USD extended its gains and the pair cleared the 1.31 barrier early in US trading. Traders were apparently reluctant to hold USD long positions going into the Fed monetary policy decision. Afterwards, this reluctance proved to be justified. The Fed indicated that it will keep its policy rate low for a prolonged period of time. It also announced additional measures of quantitative easing, including buying US treasuries and an additional buying of MBS and agency debt. This big Fed move hammered US interest rates and also the US dollar faced a massive set-back. EUR/USD jumped from the 1.31 area to the 1.34 area in a first reaction and additional follow-through USD selling made EUR/USD close the session near the highs at 1.3474, to be compared to a 1.3017 close on Wednesday evening.
In overnight trading EUR/USD lost a small part of yesterday’s post-Fed gains and is traded in the mid 1.34 area.
Today, the weekly jobless claims, the leading indicators and the Philly Fed survey are scheduled for release. The European calendar is thin, but there is an ECB nonmonetary policy meeting. After the big move from the Fed, it will be interesting to see whether ECB members feel the need to give some kind of ‘reaction’ on the developments in the US. However, price action on the market will still be guided by yesterday’s Fed decision. In particular, the reaction on the stock markets will continue to be an important driver for EUR/USD trading. In this respect, the reaction on the US stock markets was constructive, but not really euphoric and this can also be said from the stock market reaction in Asia this morning. Nevertheless, we expect some more repositioning out of the dollar after the Fed interest rate decision.
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. 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. This pattern is of course overruled after yesterday’s big Fed move. Quantitative easing and artificially low interest rates, in theory are no support for a currency, especially not for the currency of a country with an external deficit. We are well aware that the more conservative approach in Europe contains risk of a delay in the economic rebound. Over time, this could become a negative factor for the euro. However, in a first instance we expected the Fed policy step to continue to weigh on the US currency.
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 and a gradual rebound occurred. Recently we indicated that a retest of the 1.3330 could be on the cards. This target was clear in a forceful move yesterday. EUR/USD is now again above the previous sideways range. The picture remains EUR/USD constructive as long the pair holds above this area. We maintain a ST buy-on-dips approach in EUR/USD. The 1.3798 (2008 high) is the next target.
On Wednesday, USD/JPY already lost some ground early in the session on global dollar caution ahead of the Fed decision. The Fed’s QE steps also triggered a sharp USD/JPY selling wave. The pair closed the session at 0.9622, compared to 98.60 on Tuesday.
Overnight, the gains on the Asian/Japanese stock market on were not really excessive. Japanese eco data were mix (All industry index better than expected/ department store sales disappointing), but the focus was on the consequences of the Fed decision. There was some additional follow through dollar selling.
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. The break above the key 94.65 resistance improved the ST picture further. Last week, the USD/JPY rebound lost momentum with rally blocked in 99.69 area. We turned neutral on USD/JPY as we had the impression that the 100.55 resistance area would be difficult to break in a first attempt. We had a range trading strategy in the 94.65/100.55-102.20 trading range. Yesterday’s Fed move also changed the picture for USD/JP. The pair currently tests the 96.65 reaction low. This is a first important warning signal. A break below the 94.65 (previous reaction high) would make the picture again negative for this pair. In a day-to day perspective we put the risk at least for a test of this key support area.
On Wednesday, sterling came again under heavy pressure. The move started early in European trading. We didn’t see much eco news at that time to explain the move. However, the sterling sensitive news was published later in the session. The UK labour market data came out much worse than expected. These data reinforced the selling pressure on sterling. Markets also took a close look at the BoE minutes of the previous meeting. The report didn’t bring much new info, but we retain that the BoE is very determined to support nominal spending. The bank gives no open assessment on the weakness of sterling, but they still assume that the current sterling rate at some point should support a substitution towards domestic products. In this respect, we have the feeling that the Bank is not really unhappy with current sterling exchange rate. Nevertheless, the poor labour market report was the main reason for the new sterling selling wave and EUR/GBP traded already temporary above the 0.94 mark around noon. Later in the session the sterling selling pressure eased but the Fed-policy decision and the subsequent euro gains also filtered through into EUR/GBP. The pair closed the session at 0.9440, compared to 0.9269 on Tuesday.
Today, the UK Public finance data and the Money supply data are on the agenda. Later the CBI industrial trends will be published. Yesterday, we indicated that poor UK eco data still contain a risk for additional sterling losses. We hold on to that bias, even if we expect any market reaction to be less aggressive compared to yesterday’s move. As was already the case last month, we do not only look to the CBI survey. In the current environment, the Budget data have also market moving potential.
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. 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. Recently, we had a buy-on-dips approach. The pair already cleared the 0.9320 and 0.9420 resistances. This opens the way for return action to the key 0.9519 reaction high.
