On Tuesday, the euro finally found some relief after the steep correction on Friday and on Monday. EUR/USD set a correction low on Monday evening in Europe on the back of the rating downgrade of Hungary and Ireland. However, there was not followthrough selling and the Monday lows proved an (interim?) bottom. Yesterday, EUR/USD sentiment improved. As usual, the improvement in global investor stock market sentiment was the main driver for this EUR/USD rebound. Factors that were seen a negative for the euro (e.g. lower than expected European CPI figures) were largely ignored. This was also the case for a series of poor US eco data (CS house prices, Chicago PMI and consumer confidence). There was also a lot of market talk on end-of-quarter and fixing related activity. This end of quarter activity and investor repositioning ahead of the ECB policy meeting tomorrow caused quite some order driven trading. The single currency had to give up part of the early gains later in the session. Nevertheless, the euro staged quite a reasonable performance and closed the session at 1.3250, compared to 1.3199 on Monday.
Overnight, some negative headlines hit the screens. There was a lot of ado on a Bloomberg report that the Obama administration believed a quick, negotiated bankruptcy is the most likely scenario for GM. US government sources downplayed the report, but this headline obviously made investors again more risk avers, pushing US stock market futures into the red. EUR/USD fell (temporary) below the 1.32 mark on this news.
At the start of the new quarter/month, as usual, a series of important eco data are scheduled for release. Markets in particular will take a close look at the US ADP labour market report and ISM of the manufacturing sector. Recently, the most important eco data didn’t bring many positive signals to support the case that the US or other major economies were close to bottom. Interesting to see whether today’s data will draw a different picture. From a currency point of view, we look out whether the trading pattern holds that (global) bad news is helping the dollar to take advantage from its safe haven status. On top of that, the start of the G20 meeting and even more, tomorrow’s ECB interest rate decision might also remain a source of some investor caution. In this environment, the room for addition euro gains today might be rather limited. The uncertainty on the fate of the US automakers is no help either.
Global context. After a gradual euro correction since the start of the year, EUR/USD bottomed out 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 petered out rather soon, despite the discussion on the role of the USD as reserve currency developing ahead of the G20 meeting. Spots of risk aversion popping up from time to time (cf the overnight auto sector headlines) continue to hamper a more sustained euro rebound.
In a longer term perspective, we 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. On the euro side of this story, this week’s ECB meeting could be very important. The key question is whether the ECB will open the way for additional steps toward non-conventional/quantitative policy measures (buying CP or corporate bonds). If, so this could become a euro negative factor. However, the ECB taking aggressive steps in that direction is not our preferred scenario for now.
In a short-term perspective, we couldn’t ignore the rather steep decline in EUR/USD on Friday. Rising uncertainty on the global financial and economic developments and on the outcome of the ECB meeting 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. We wait for signals of a bottoming out of this process to consider re-buying the pair at lower levels.
On Monday USD/JPY extended the rebound that started on Monday morning. The move accelerated in US trading supported a constructive start of the US equity markets. The pair closed the session at 98.96, compared to 97.26 on Monday evening.
Overnight, the Tankan business confidence report and the headlines on the US automobile sector set the tone for trading. USD/JPY spiked higher after a sharp decline in the Tankan headline figure, but the cross rate turned south again on the US auto news. Japanese/Asian stocks reacted in rather muted (or even positive) to the negative news and this gives the pair some downside protection going into the start of European trading.
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. Nevertheless, we have to admit that USD/JPY remained well bid recently.
On Tuesday, trading in the EUR/GBP currency pair showed quite some strange intraday swings. However, at the end of the day the pair was little changed. EUR/GBP spiked higher at the open in Europe and settled in 0.93 area for most of the day. We didn’t see any specific reason to explain this move. Later in the session, a new OECD forecast on the UK economy showed an expected economic contraction for the UK of 3.7 %. However, this isn’t that bad compared to the other major economies. With an anticipated budget deficit of 9% this year, the OECD saw only limited room to for additional fiscal stimulation. UK’s finance minster Darling before parliament defended the government’s measures to support the economy. EUR/GBP had to give up the early gains as cable outperformed EUR/USD at the end of the session. EUR/GBP closed the session at 0.9256, little changed from the 0.9250 close on Monday.
Today, UK PMI for the manufacturing sector will be published. The market expects stabilization at a low level (35 from 34.7 in February). Recently, similar indictors in Europe but also in the UK (CBI industrial trends) continued to point to ongoing weakness in the area of the economy. So, the risks for the indicator might still be on the downside of consensus.
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). As is the case for other euro cross rates, tomorrow’s ECB interest rate decision might be important for the fate of the euro (QE or not, cf supra).
