On Wednesday, the EUR/USD cross rate didn’t show any outspoken trading dynamics. Traders were in a wait-and-see mode ahead of today’s ECB interest rate decision. The euro temporary dropped below the 1.32 mark at the start of trading in Europe. This was due to the negative opening on the European stock markets and on the back of a Bloomberg article that the Obama administration believed that a negotiated bankruptcy was the most likely way to restructure GM. The article was denied by the administration but sent stocks and the euro lower early in European trading. However, the market reaction was not really aggressive and both EUR/USD and stocks trended higher throughout the session. The US eco data (ADP and ISM) were mixed. They caused some intraday volatility but at the end of the day EUR/USD closed the session at 1.3249, rather close to the levels that were on the screens earlier this week.
Today, all eyes are on the ECB interest rate decision. A 50 basis points rate cut to 1.00% is widely expected. However, the key question is whether, and if so, which additional policy measures the ECB will announce. An extension of the duration of the repo financing operations is very likely and shouldn’t be important for the euro. The key question is whether the ECB will prepare markets for additional nonconventional policy measures, like the buying of CP or corporate bonds. In such a scenario of the ECB moving towards a BoE/Fed-like policy, a negative catching-up move of the euro would be quite logic. This is not our preferred scenario, but we will keep a close eye on the press conference. Yesterday, market rumours indicated that the ECB was considering interventions to support CE currencies. We are very reluctant to join this scenario. On the other hand, one can raise the question, whether investors will be happy if the ECB would stick to its current approach. So, at first sight, there might not be that much upside potential for the euro, whatever the ECB decision. Of course, the euro will also continue to be affected by global market themes. A positive stock market reaction in the wake of the G20 meeting or investors turning more hopeful that the economy is coming closer to the bottom might continue to give the euro downside protection. The strong performance of the Asian stock markets this morning supports this scenario.
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, today’s ECB meeting could be very important (cf supra). However, the ECB taking aggressive steps in that direction is not our preferred scenario for now.
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 last 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. For now, the picture of the EUR/USD currency pair looks rather indecisive. Price action after the ECB interest rate decision could be an important indication to see whether this correction has run its course.
On Wednesday, USD/JPY several times moved up and down in a range between 98.40 and 99.20, but was not really able to force a break on either side of this range. The Tankan report, the GM story, the different stock market reaction in Japan and in Europe or the eco data at best only had an intraday impact on trading. USD/JPY closed the session at 98.53, compared to 98.96 on Tuesday.
This morning, Japanese (and Asian) stock markets showed decent gains on market hopes that the world economy might be close to a bottom. Better (less weak) US auto sales might have played a role, too.
Global context. Over the previous months, 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. This hurt the yen’s safe haven status and triggered a USD/JPY rebound with the pair settling reaction high at 110.55. This rebound ran out of steam and the pair settled in a sideways trading pattern between 93.50 and 100. Recently, the downside in USD/JPY proved to be rather well protected. A break above the 100.55 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. In a longer term perspective, it would be a bit strange to expect sharp yen losses. Sharp losses of the currency of an excess country are not really a solution to the highly needed global rebalancing exercise.
On Wednesday, EUR/GBP trading again experienced a volatile trading session. Sterling was well bid at the start of the session and EUR/GBP set a reaction low in the 0.9160 area after the publication of a better than expected UK manufacturing PMI. However, this important support area (previous reaction low) could not be broken and EUR/GBP recouped the earlier losses. Later in the session, cable again outperformed EUR/USD (uncertainty ahead of the ECB interest rate decision) and EUR/GBP returned to the intraday lows and closed the session at 0.9159, compared to 0.9256 on Tuesday. This morning EUR/GBP is still being traded in this area.
This morning, Nationwide house prices surprised on the upside with a 0.9% M/M gain. Later, the construction PMI will be published. However, the global market reaction to the ECB decision and to the results of the G20 meeting will be the most important drivers for sterling trading. Recently, it was not always clear whether an improvement in global sentiment was more supportive for the euro rather than for sterling. However, in a day-to-day perspective, we have the impression that sterling sentiment isn’t that negative.
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. The pair currently tests a first intermediate support area (neckline triple top 0.9160/46 area). Giving away this level would open the way to the 0.9072/83 neckline. A sustained break below the 0.9072/83 neckline would question our short-term EUR/GBP positive bias (Stop-loss). We don’t change our standing sterling skeptic bias yet. Nevertheless, we are not in a hurry to add/reinstall EUR/GBP long positions. Also for this cross rate, the market reaction to the ECB interest rate decision could be key.
