On Thursday, EUR/USD continued the steep rise that started after the Fed announcement on Wednesday evening. The after-shock on this Fed decision still was the only driver for price action on almost all USD cross rates. Markets still try to make up their mind on the medium and longer term consequences of an aggressive policy of quantitative easing. However, the first assessment is quite straightforward: flooding the market with dollar and putting long-term interest rates at an (artificially) low level makes investors reluctant to buy the US currency, especially as long as there are no indications that this aggressive approach will filter through into the economy anytime soon. In this respect, a better than expected Philly Fed survey obviously is not enough to turn USD positive. EUR/USD closed the session at 1.3665 compared to 1.3474 on Wednesday. It is premature to label the price action over the previous 36 hours as dollar selling panic, but it is more than preferable that the sell-off of the US currency shifts into a lower gear anytime soon to prevent disorderly price action. At least this morning, the pair entered calmer waters. Nevertheless, in the financial press there are a lot of headlines on the potential debasement of the USD as the world’s reserve currency.
Today, the eco calendar is almost empty, with only the EMU production data (Jan) on the agenda. There might be some market talk on the (lack of) additional measures that were discussed on the EU summit, but this will also have no lasting impact on EUR/USD trading, we think.
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 last week, any attempt of the euro to regain ground ran rapidly into resistance. This pattern was overruled after Wednesday’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 took place. Recently we indicated that some bottoming out and even return action to the 1.3330 range top could be on the cards. This target was cleared in a forceful move after the Fed announcement. EUR/USD is now again above the previous sideways range. The picture remains EUR/USD constructive as long the pair holds above this area. Yesterday, we maintained our EUR/USD positive bias and put forward the 1.3798 (2008 high) as potential next target. The pair came already rather close to that area (1.3735) yesterday. In a day-to-day perspective, there might be some easing on the recent USD sell-off. However, longer term, we see no trigger available to turn less USD pessimistic. LT the picture stays EUR/USD constructive as long as the pair holds above the 1.3330 previous range top.
On Thursday, USD/JPY joined the broader USD sell-off and in several selling waves the pair dropped from intraday highs in Asia above the 96 mark to test bids in the 93.55 area in US trading. At some point there were rumours of official rate checking, however for now we have no hard evidence that any action might be around the corner. USD/JPY closed the session at 94.51, compared to 96.22 on Wednesday.
Today, Japanese markets are close for the spring equinox holiday.
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. The break above the key 94.65 resistance improved the ST picture further. Last week, the USD/JPY rebound lost momentum with the 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 and adopted a range trading strategy in the 94.65/100.55-102.20 trading range. However, Wednesday’s Fed move also dramatically changed the picture for USD/JPY. The drop below the 95.65 reaction low was a first important warning signal. Yesterday’s below 94.65 (previous reaction high) makes the picture in this pair again negative. In a day-to-day perspective, the USD decline might shift into a lower gear. LT there the USD picture has become very fragile, to say the least.
On Thursday, the decline of sterling against the euro ran out of steam. The focus in the market was on the dollar cross rates (EUR/USD and cable). The EUR/GBP price action was the result of the sharp (erratic) swings in those dollar cross rates. The UK eco data (big budget deficit, poor CBI industrial order balance) were largely ignored by the markets. EUR/GBP closed the session at 0.9419, compared to 0.9444 on Wednesday.
Today, UK calendar is empty.
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. As this resistance comes closer, the EUR/GBP rebound might at least temporary slow. However, in longer term perspective, we don’t feel any need to row against the sterling negative tide.
