On Monday, EUR/USD extended the decline that started at the end of last week, though at a slower pace. The pair slipped south throughout the morning session in Europe and during the early hours of US trading. Deteriorating global investor sentiment was the main driver and the European data were of no help either. In this respect, the bail-out of a Spanish bank, poor EU confidence indicators and the steep decline in inflation in some euro-zone member states all weighed on the single currency. During the US trading hours, the market focus shifted the assessment of the Obama administration on the rescue packages of the US automakers. The administration keeping open the option of bankruptcy for the US automakers that need government support only added to the global negative sentiment. EUR/USD tested bids in the 1.3115 area late in European trading. ECB president Trichet in an appearance before the European parliament took notice of president Obama’s opposition to China’s plan to create a global reserve currency and also referred to recent US comments that a strong dollar is in the interest of the US. However, those comments had no lasting impact on trading. Later in the session, pressure on EUR/USD eased slightly (despite a credit rating downgrades of Ireland and Hungary) and the pair closed the session at 1.3199, compared to 1.3287 on Friday.
Today, the calendar is well filled. In Europe, the German labour market data and the flash European CPI estimate will be published. In the US, the CS house prices, the Chicago PMI and the consumer confidence are on the agenda. Usually, European eco data are not that important for the currency market. However, the ECB meeting on Thursday, a negative surprise of the European inflation might cause some additional nervousness vis-à-vis the euro. On the G20 meeting, a draft version of the statement is said to contain a phrase that the G20 members will refrain from currency moves that would hurt each others economies. At last for now, it looks as if the debate on alternatives for the US dollar as reserve currency will not openly be addressed at this meeting or in the official communication. Regarding the day-to-day market sentiment, Asian stock markets managed to limit the damage this morning and this also gives EUR/USD some downside protection.
Global context. After a gradual euro correction since the start of the year, EUR/USD bottomed out since mid February. The market focus on the intra-EU tensions eased and two weeks ago the additional steps of the Fed towards quantitative easing triggered an aggressive USD sell-off. However, this USD sell-off was rather short-lived, despite the discussion on the role of the USD as reserve currency ahead of the G20 meeting. This was/is a disappointing performance from a EUR/USD point of view. Over the previous months, declining risk aversion in general supported the euro and was a negative factor for the dollar. However, EUR/USD didn’t make much progress on the positive global market reaction to the US toxic assets plan either. On the other hand, the single currency was hit hard by the stock market correction that started at the end of last week.
In a longer term perspective, we were and remain cautious on the USD, especially as long as there is no hard evidence that the aggressive fiscal and monetary measures in the US had put the floor for a sustained improvement in US economic activity. We still question whether there stays enough a good reason for (major) USD investors like China to add to USD positions in a context of US quantitative easing and extremely low US interest rates. However, short-term, we can’t ignore the steep decline in EUR/USD on Friday. Rising uncertainty on the global financial and economic developments and on the outcome of the ECB meeting (will they preannounce another step toward quantitative easing) is apparently still a good reason for investors to scale back EUR/USD long positions.
From a technical point of view, EUR/USD set a reaction low at 1.2457 early March. First, a gradual rebound took place. The forceful move after the Fed announcement catapulted the pair above the 1.3330 range top, making the ST picture EUR/USD positive. However, the rebound ran into resistance ahead of the 1.3798 previous high. Profit taking kicked in and on Friday, the pair fell again in the previous sideways range, making the picture for EUR/USD again neutral. This forced us to leave our ST euro positive bias. In a day-to-day perspective, the correction even might have some further to go. We wait for signals of a bottoming out of this process to consider re-buying the pair at lower levels.
On Monday USD/JPY again showed quite some intra-day volatility, but at the end of the day, the pair was not that much changed compared to the levels that were on the screens at the end of last week. In Asia, the yen rebounded in step with a poor Asian stock market performance. However, this move could not be sustained and the dollar regained most of the earlier losses later in the session. This confirms the feeling that the yen is not really able anymore to take advantage of global market stress. Apparently, at this stage the dollar and the yen are seen more or less equal to take up the role of safe have currency. USD/JPY close the session at 97.26, compared to 97.86 on Friday evening.
This morning, Japanese eco data were mixed with the labour market data and housing data weaker than expected; household spending data were slightly less negative than expected. There is again a lot of talk on additional stimulus measures to create jobs and support global demand that will be part of a global plan, expected to be unveiled next month.
Global context. Looking at the charts, USD/JPY set a reaction low in the 87.15 area in December as the yen took advantage from its safe haven status. However, since then, the market gradually came to question the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy. The USD/JPY rebound ran out of steam just ahead of the 100 mark and the pair settled in a sideways trading pattern between 93.50 and 100. 100.55 is the key barrier on the upside. A break above this level would signal more USD gains. For now, we hold on to our range trading strategy and do not front-run on a break above this level.
On Monday, sterling was under (slight) pressure at the start of the session as the pair tested offers in the 0.9340 area early in the session. However, the global euro correction resumed soon and EUR/GBP continued to drift lower throughout session and closed the day at 0.9250, compared to 0.9281 on Friday. The UK lending data were slightly better than expected, but were no important driver for trading. We consider yesterday’s price action in this as part of the global euro correction that started at the end of last week. However, from technical point of view, the move is not really significant, yet. In its appearance before the EU parliament, he said that UK is welcome to join the euro. However, also this remark had no impact on trading.
This morning, UK GFK consumer confidence came out better than expected at -30. However, there was no reaction on the EUR/GBP charts. Later today, the UK eco calendar is thin. BoE’s Tucker, Haldane and Bailey will testify to the House of Lords committee.
Global Medium term context. At the start of 2009, EUR/GBP in several steps, made a forceful correction after the steep sterling losses mid-December. The pair extensively tested the key support area (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 aggressive BoE QE approach a potential risk factor for sterling. The break above the 0.9083/72 neckline made the MT technical picture for EUR/GBP again positive and opened the way for return action to the key 0.9519 reaction high. As this resistance came closer, the EUR/GBP shifted into a lower gear and even gave up some of the recent gains. Nevertheless, we don’t change our standing sterling skeptic bias yet. So, we maintain our buy-on-dips approach with the 0.9520 area still the next high profile level on the charts. The 0.9156 reaction low is a first intermediate ST support. A sustained break below the 0.9072/83 neckline would question our short-term EUR/GBP positive bias (Stop-loss).
