The EUR/USD cross rate performed quite an impressive rebound on Thursday. There were two obvious drivers for this move. Firstly, stock markets worldwide recorded strong gains and investor risk appetite is still an important driver for the single currency. On top of that, the ECB surprised the markets as it cut rates by only 25 basis points to 1.25% while a reduction to 1.0% was largely expected. The ECB also deferred the decision on any additional non-conventional measures to next month’s meeting. A lot of market participants were disappointed by the ECB decision and there was a lot of trader talk of the ECB still being behind the curve. However, the least one can say is that the euro didn’t confirm this assessment. EUR/USD was already well bid ahead of the ECB interest rate decision and the gains were extended after the decision and the press conference. Of course, at that time, the ongoing stock market rally, fuelled by the G20 optimism, continued to exercise its supporting effect on EUR/USD, too. The pair closed the session 1.3461, compared to 1.3249 on Wednesday.
Today, markets will continue to make up their mind on the potential impact of the G20 plans for the world economy in the short and medium term. In this respect, it will be interesting to see how long yesterday’s market enthusiasm will last. Later today, the market focus will shift to the US payrolls report. Given recent data for the US labour market, it is difficult to expect any good news from this release. Nevertheless, the market reaction to this report will be interesting, for all markets, including to currency market. After the recent, strong gains of the stock markets and of EUR/USD, some consolidation or even some (end of week) profit taking shouldn’t come as a surprise.
Global context. After the 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. 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. Yesterday’s G20 plans and ECB interest rate decision might become important factors for global markets and for EUR/USD.
If the G20 meeting would be able to mark some kind of short-term turning point for global market sentiment, this should be supportive for the non-safe haven currency, including the euro. Regarding, yesterday’s ECB interest rate decision, the less aggressive ECB approach on non-conventional measures compared to the Fed and the Bank of England is already for long the reason why we favour the euro over the dollar and sterling in a longer-term perspective. In this respect we feel supported in our assessment. Of course, this long-term view won’t guide the day-to-day price action, but yesterday’s events should give the euro additional downside protection in a longer term perspective.
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. 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. Yesterday’s move can only be considered as euro positive, but we are not convinced that the pair will be able to build on this momentum right now. So, we wouldn’t be surprised to see some ST profit taking. EUR/USD holding above the 1.3330 area would be a positive sign. The pair should hold above the 1.3113 reaction low to keep the ST positive momentum. So, we look to play the 1.3113/1.3738 trading range. Within this range, we adopt a buy-on-dips approach.
On Thursday, USD/JPY remained well bid, supported by the constructive global market sentiment. However, given the strong gains on the stock markets, the gains in the pair were not really excessive. Most of the improvements were recorded early in the session. Especially the reaction to the communiqué from the G20 was rather muted. USD/JPY closed the session at 99.52, compared to 98.53 on Wednesday.
This morning, Japanese (and Asian) stock markets show some, albeit moderate, gains on the back of yesterday’s G20 outcome. Nevertheless, this didn’t prevent USD/JPY from setting a (temporary) new high above the 100 mark.
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 setting a 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 and the overall positive investor sentiment brought the pair again to the top of the MT trading range. A break above the 100.55 level would signal more USD gains. We can’t ignore the ST positive momentum in this pair. Nevertheless, we still have the impression that additional gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) would be far less easy. So, partial profit-taking/stop loss protection on USD/JPY might be considered.
On Thursday, trading in the EUR/GBP currency pair again showed an elevated intraday volatility. Sterling gained against the single currency early in the session, supported by better than expected Nationwide house prices. At that time, improved global sentiment also support sterling, both against the dollar and the euro. However, the surprise 0.25% basis points ECB rate cut was also the turning point for the price action in EUR/GBP. The pair recouped the earlier losses and closed the session at 0.9143, compared to 0.9159 on Wednesday.
Today, the UK PMI services and the HBOS house prices are on the agenda. After the a better than expected manufacturing PMI and some tentative sings of bottoming out in other UK housing data, it will be interesting to see the market reaction to these two indicators. Over the previous days, we had the impression that sterling had become somewhat more sensitive to positive news from the UK. We look out whether this pattern holds after yesterday’s ECB decision.
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 gave up some of the recent gains. Yesterday, the pair even came close to the 0.9072 neckline. At least for now, the test was rejected. 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 still wait for confirmation that this area holds add/reinstall EUR/GBP long positions.
