On Monday, the EUR/USD currency pair mirrored the change in sentiment that was visible in almost all other markets. In Asia and early in European trading, it looked as if global markets would continue to build on the positive investor sentiment that was visible at the end of last week. This also supported EUR/USD and the pair was traded above the 1.3550 mark at the start of trading in Europe. However, as equity investors turned less optimistic later in the session, the stock market correction also triggered the ‘logical’ correction in EUR/USD. The pair was sold in a fairly aggressive way early in US trading. A similar move was visible in almost all asset classes that had profited from the emerging recovery hope, including commodities like oil or copper. Stocks recouped part of the early losses late in the US. Nevertheless, EUR/USD closed the session at 1.3416, compared to 1.3486 on Friday. So, the pair gave back an important part of its post-ECB gains. Profit taking on the steep gains in EUR/JPY probably reinforced the correction in EUR/USD, too.
Today, the eco calendar on both sides of the Atlantic is again thin as it only contains some second tier data series. So, stocks will again be the most important guide for trading. In the days and weeks to come it will also be interesting to see how markets will react to the corporate earnings and their assessment on the economic situation further out this year. Will the recent market optimism be able to withstand bad news? If not, this could become a negative factor for the euro, at least shot-term. Later this week, market liquidity might become thinner and trading volumes might decline going into the Easter holiday weekend.
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.
Over the previous weeks, global investor sentiment grew more optimistic. Combined with the ECB holding to a more cautious approach on quantitative easing, this (temporary) supported the euro against the dollar. However, investors’ assessment of the financial and economic situation is still subjected to a lot of uncertainty and even less important news headlines are sometimes able to cause rather sharp swings in sentiment that filter through in almost all markets. In a longer term perspective, we don’t see enough a reason for a sustained dollar rebound. However, in a day-to-day perspective, the swings in investor sentiment can also cause rather hefty swings in the major currency cross rates. In such a context, one can not but keeping a close eye on the technical framework.
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. For now, we prefer a range trading strategy within the 1.3113/1.3738 trading range. Within this range, we continue to adopt a buy-on-dips approach in case of return action lower in this range. A drop below the 1.3113 range bottom would question our short-term euro positive bias (ST stop-loss).
On Monday, the price action in the USD/JPY cross rate mirrored the swings in global market sentiment. The pair extended the recent uptrend in Asia and early in European trading. However, the party was over as soon as the US joined the price action. Stocks nosedived and USD/JPY had to give up part of the earlier gains. Nevertheless; the pair closed session at 100.99, still a decent gain compared to the 100.31 close on Friday evening.
This morning, Asian stock markets show a mixed picture, but in general the changes in the major stock market indices are rather limited. The BOJ as expected left its interest rate unchanged at 0.10% deeds. The bank decided to expand range of eligible collateral. USD/JPY hovered in a 100.40/101 trading range.
The Reserve Bank of Australia cut its benchmark rate by 25 basis points to 3%. The Aussie dollar gained slightly ground after the decision. Some in the market apparently had hoped for a bolder step.
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. 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. Global investor sentiment turning less optimistic supports this bias to turn more cautious on USD/JPY short-term.
On Monday, sterling trading to some extent also tracked the intraday change in investor sentiment on other markets. Recently, sterling gained some ground on the easing in global (financial) tensions. Some better than expected UK data also helped the UK currency. Sterling was still well bid during the morning session and it looked as if EUR/GBP would be able to settle below the key 0.9072 support area as the pair tested bids in the 0.9040 area. However, sterling was also not able the resist the Uturn on the other markets. EUR/GBP spiked higher (despite the decline in EUR/USD at the same time) and the pair closed the session at 0.9086, almost unchanged from the 0.9084 close on Friday.
Today, the UK industrial production data will be published. Recently, some UK data series indicated that the decline in UK economic activity might be slowing. However, it is probably too early to already see such an improvement in the February production data. This morning a quarterly BCC survey indicated an easing in the contraction of activity in the services sector. However, the data for the manufacturing sector continued to set new lows. Today, we also look out for the 10-year Gilt auction. Recently, auctions with longer maturities didn’t go that well. Another disappointing result would be no help for sterling.
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. 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 sill under heavy pressure. A sustained break below this neckline would question our short-term 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.
