On Tuesday, the EUR/USD continued to move south as stocks extended the correction that started on Monday. In Asia, selling from EUR/JPY triggered a first selling wave. An additional dip occurred during the morning session in Europe. At that time, final European Q4 GDP figures came out lower than expected (downward revision). Final European GDP data are outdated and have usually no impact on trading. However, in the current environment, they were a good excuse to accelerate the selling wave. EUR/USD tested bids in the 1.3230 area at the start of US trading. Later in the session, the decline slowed, but as stocks stayed in the red, there was no upside for EUR/USD either. The pair closed the session at 1.3272, compared to 1.3416 on Monday evening.
This morning in Asia, yesterday’s trading pattern was copied with a rather steep decline in both EUR/JPY and EUR/USD, bringing the EUR/USD cross rate in the 1.3170 are at the moment of writing.
Today, the eco calendar is again thin. The US weekly mortgage application might get some attention and the same applies to the EU commission growth forecasts and German factory orders. However, the stock market performance will continue to be a dominant factor for trading on almost all other markets including the currency market. In this respect, the weaker than expected results of Alcoa after market in the US and rumours on GM stepping up the preparations for a possible bankruptcy filling don’t bode well for the fate of the single currency today. Equity markets will almost certainly take a poor start in Europe this will keep the euro under pressure, too.
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 and 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. During the month of March, 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 subject 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. This was obviously the case since the start of this week. Investors turned more cautious ahead of the Q1 earnings season and this also triggered the standard reaction on the currency markets. The dollar and the yen are attracting safe haven flows. The euro is pushed into defense. In such a context of highly instable investor sentiment in almost all markets, 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. Recently, we put forward a range trading strategy within the 1.3113/1.3738 trading range. In a longer term perspective, we still prefer a buy-on-dips approach. However, given the brisk change in investor sentiment over the previous days, we’re not in a hurry to add/reinstall EUR/USD positions. We first watch out whether the 1.3113 range bottom will be able to play its role as support. On top of that, market liquidity conditions might become less favourable going into the Easter holidays. The might spark some erratic trading and widen the swings in a market that is already quite nervous.
On Tuesday, the yen gained some ground on the deteriorating global market sentiment. However, at least against the dollar, the gains were not really spectacular. USD/JPY tested bids just blow the 100 mark around noon in Europe. During the US trading hours the dollar recouped a big part of the earlier losses. This only illustrates that, at least for now, the yen has lost some of its attractiveness as a safe haven visà- vis the dollar. USD/JPY closed the session at 100.42 compared to 100.99 on Monday.
This morning, Asian stock markets continue to move south with the Nikkei showing a loss of 2.69%. The Japanese March current account data were slightly better than expected, but those data are not really a factor of importance for the currency market. Asian investors apparently continue to see value in the yen as safe have currency as USD/JPY is returning below the 100 mark this morning. A drop below yesterday’s reaction low (99.85, currently under test) might reaccelerate the correction. The Japanese government intends to give more details on a new stimulus package later today.
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. Nevertheless, over the previous days, we advocated that additional gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) would be far less easy. We turned more cautious on USD/JPY short-term. Partial profit-taking/stop loss protection on USD/JPY longs might still be rewarding.
In line with the price action over the previous sessions, sterling held up rather well, despite growing nervousness on global markets. The losses of sterling against the yen and the dollar were much more limited compared to the euro. So, EUR/GBP extended the recent decline. UK production data were marginally better than expected, but at the time of the publication only had a limited impact on trading. Technical considerations played a role too, as the decline accelerated when the 0.9040 (ST correction low) was broken. A poor 10-year Gilt auction in the UK had also no lasting consequences for sterling trading. The pair closed the session at 0.9008, compared to 0.9087 on Monday evening.
This morning, the March NIESR GDP estimate came out at -1.5% (unchanged, but from an upwardly revised -1.5%. Nationwide consumer confidence was weaker than expected as the indicator returned to the cycle lows (41 from 43 in February). Later today, only the BRC shop prices are scheduled fro release.
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 (0.8663/37 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. The break below the 0.9083/72 neckline is a short-term negative from a technical point of view. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. However, with the ST technical picture turning less supportive, we don’t row against the tide yet. We maintain our short-term wait-and-see approach and watch out how far this correction goes. 0.8637 is still the line in the sand longer term.
