On Friday, the immediate impact from the Fed decision on markets gradually petered out. There were no important eco data on the calendar. So, the currency markets tried to find some kind of short-term equilibrium. EUR/USD revisited the 1.37 mark early in European trading. However, no further follow through gains occurred and later in the session, EUR/USD faced some profit taking. A less buoyant stock market performance added to this move. So, after two days of strong gains, EUR/USD made a step backward and the pair closed the session at 1.3582, compared to 1.3665 on Thursday.
Today, the eco calendar contains the existing home sales in the US and some second tier eco data in Europe. However the focus in the markets will be on the US plans to address the problems of the toxic assets on banks’ balance sheets. Some big lines of the plan are already discussed in the financial press this morning. Apparently, the US authorities prepare a plan to remove up to 1 trillion of such assets in partnership with private investors. Last month, the lack of details on such a plan and doubts on the execution were at the origin of a new spike in risk avers investor behaviour. However, this morning (Asian) markets apparently are inclined to take a more positive attitude to the new plans and this also supports the euro this morning. In an interview, Mr. Trichet indicated that rates could be cut further from the current 1.5% level but suggested that the bank is not preparing the outright buying of assets. Nevertheless, the stock market reaction on the US plans will be key for EUR/USD trading today. Al least for now, the euro apparently remains well.
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. 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 also were a negative factor for the euro. 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 but it was last week’s Fed decision that really changed the course of events in EUR/USD. 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. On top of that, until better risk appetite was euro supportive factor. Looking at the recent price action, this apparently remains the case. Over time, it will be interesting to see whether markets gradually grow more confident that the current US measures will put the US in pole position for the economic recovery. If so, this could over time become a dollar supportive factor. However, in a short-term perspective, this is not the way the market thinking goes.
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. The forceful move after the Fed announcement last week, catapulted the pair again above the 1.3330 range top. The picture remains EUR/USD constructive as long the pair holds above this area. Already for some time, we have a euro positive bias and last week we put forward 1.3798 (2008 high) as potential next target. The pair came already rather close to that area (1.3735) on Thursday. After some consolidation last Friday, the euro is again well bid this morning. So, a retest of the 1.3739/98 area is on the cards. A sustained break above the letter could trigger another euro buying wave. Return action below the 1.3485/48 area would be a first indication that the euro rebound is losing momentum.
On Friday, Japanese markets were closed for the spring equinox holiday. A broader dollar rebound on the recent sell-off was also visible in USD/JPY and the pair closed session at 95.94, compared to 94.51 on Thursday.
This morning, USD/JPY is being traded a few ticks higher compared to the close on Friday. Stock market gains in anticipation of the US plan to address the problem of toxic assets push USD/JPY slightly higher. EUR/JPY shows stronger gains and trades at the highest level since end October.
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. However the really ran out of steam just a head of the 100 mark. 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. The pair temporary dropped below 94.65 (previous reaction high), but the test was rejected. The picture in USD/JPY is indecisive. For now we stay neutral. Nevertheless, the downside in USD/JPY looks better protected compared to other dollar cross rates (including USD/EUR).
On Friday, EUR/GBP trading still showed some intraday volatility, but in a broader perspective, it looks as if the pair entered calmer waters after the spike higher earlier last week. In order driven trade, the pair drifted lower and closed the session at 0.9388 compared to 0.9419 on Thursday.
Today, the UK calendar is empty. Global factors will continue to set the tone for trading. Last week, improved investor risk appetite was no big support for sterling in particular not against the euro. So, in this respect, we look out whether this pattern will be maintained this week.
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 a longer term perspective, we don’t feel any need to row against the sterling negative tide.
