On Friday, the EUR/USD currency pair entered calmer waters after the steep gains of the previous two days. Investors apparently had digested the ‘shock’ of the ECB interest rate decision. On top of that, the global stock market rally shifted into a lower gear after the G20 enthusiasm on Thursday. In this context EUR/USD settled in a sideways trading pattern in the 1.3400/70 area for most of the day. There was some intraday volatility at the time of the US payrolls and the pair temporary dropped below the 1.34 mark. However, the release was too close to expectations to really change to course of events in the major USD cross rates. After the close of the European markets, US stock recouped the initial losses and this triggered some additional dollar selling. So, EUR/USD closed the session near the intraday highs as 1.3486, little changed from the 1.3461 close on Thursday.
Today, the eco calendar is very thin on both sides of the Atlantic and also later this week, there not that many high profile eco data on the calendar. One can also expect market activity to slow down ahead of the Easter weekend. In recent years this was often a period of lower market liquidity. In a day-to-day perspective, global market sentiment and the stock market performance will remain the most obvious drivers for trading in the major cross rates.
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 the additional steps of the Fed towards quantitative easing during the March meeting 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) continued to hamper a more sustained euro rebound. The specific impact of the decisions from last week’s G20 is still very difficult to assess. Nevertheless, global sentiment remains rather constructive and continues to support the non-safe haven currencies, including the euro. In this respect, we also take notice of the fact that intra-EMU government bond spreads are declining rather sharply. Regarding, ECB policy approach there is a lot of debate in the market as to whether the ECB has done enough to support the European economy. The smaller than expected rate cut last week fueled this discussion. However, in a longer-term perspective, we see the less aggressive ECB approach as a supportive factor for the euro longer term.
From a technical point of view, EUR/USD set a reaction high at 1.3738 mid March after the Fed meeting. However, the rebound failed to take out the 1.3798 previous high. Profit taking kicked in and the pair fell again in the previous sideways range. Last week, the correction bottomed out and EUR/USD again found a better bid, supported by the smaller than expected ECB rate cut. So the pair is now again moving higher in the 1.3113/1.3738 trading range. Within this range, we continue to adopt a buy-on-dips approach.
On Friday, USD/JPY continued the established uptrend. Also for this cross rate the well-know trading patterns continued to do their job. Global positive sentiment is still seen as a good reason to sell the Japanese currency. There is even again some market talk in setting up carry trade like deals financed in yen. USD/JPY closed the session at 100.31, compared to 99.52 on Thursday.
This morning, Japanese (and Asian) stock markets are mostly in positive territory. The political tensions on North Korea launching a missile had no lasting impact on markets. USD/JPY extends its upmove and currently tests the key 100.55 resistance area.
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 99.68. 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.
On Friday, sterling was again well bid, both against the dollar and the euro. There was not one specific factor to explain this move. Recently some UK eco data tended to come out somewhat better than expected. The services PMI on Friday confirmed this pattern. On top of that, sterling is also supported by the improved investor risk appetite with GBP/JPY and cable showing decent gains. So, EUR/GBP extended the gradual decline from the previous sessions and closed the day at 0.9084, compared to 0.9143 on Thursday.
Today, the UK calendar is empty. Later this week, the BoE holds its monetary policy meeting. However, after the drastic steps that were announced last month, we don’t expect any big news for markets from this meeting.
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 most of the recent gains. Currently, the 0.9083/72 neckline is again under heavy pressure. A sustained break below this neckline questions our shortterm EUR/GBP positive bias. We don’t change our longstanding sterling skeptic bias yet. Nevertheless, in a day-today perspective, we take a more neutral approach and watch out how far this correction goes.
