On Thursday, EUR/USD trading experienced quite a calm session. However, the underlying sentiment was again euro skeptical. The pair reached an intraday low in the 1.3150 area during the morning session in Europe, even as stocks were already off the lows at that time. The pair tried to regain ground later in the session, in line with the equity gains, fueled by the publication of the results from the likes of JP Morgan and Nokia. However, this rebound was also far from convincing. The pair could not sustain above the 1.32 mark and closed the session at 1.3186, compared to 1.3227 on Wednesday. Uncertainty on the additional policy steps that will be announced at the May ECB meeting and the market feeling that there is still a lot of internal debate within the Bank on the item apparently continued to pressure the single currency.
The focus on the ECB policy going forward again played a role in the EUR/USD price action this morning. In a speech in Tokyo, ECB president Trichet said 2009 will be a very difficult year and that the ECB must do all to restore confidence. As far as we have seen for now, the ECB president didn’t elaborate on any specific measures. On currencies, he said he agreed with the US’s strong dollar policy. We didn’t see that much news in the speech. Nevertheless, the market uncertainty on the additional ECB measures remains a negative factor for the euro and the pair currently tests the 1.31 support area.
Later today, the eco calendar is very thin. The EU trade balance is not a market mover. In the US, the consumer confidence from the University of Michigan deserves some attention. Of course, the earnings’ season also continues, with among others, Citigroup and GE bring their results to the market. However, looking at the price action earlier this week, one should raise the question whether the link between equities (risk appetite) and EUR/USD is still as tight as it used to be until recently. After the close of the European markets, Fed’s Bernanke speaks at a Fed conference in Washington.
Global context. 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 a temporary 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. 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. On top of that, the announcement at the ECB press conference two weeks ago that the bank will announce non-standard measures at the May meeting is a factor of uncertainty for the single currency, especially as the markets suspect some internal debate on this item. We don’t join the analysis that the ECB is behind the curve and we think that the more balanced approach from Trichet and co might avoid a lot of side-affects and problems of unwinding later. Nevertheless, this is not main stream market assessment currently. In a short-term perspective, this ECB caution apparently is seen enough a reason for investors to scale back euro long exposure. We don’t see any reason for major euro sell-off, but the risk is for the single currency to fight an uphill battle into this factor of uncertainty is solved. The narrowing of the intra-EMU government bond spreads currently fails to support the euro.
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 and profit taking kicked in. Two weeks ago, the correction bottomed out and EUR/USD again found a better bid, supported by the smaller than expected ECB rate cut, but also this move had no strong legs. Recently, we put forward a range trading strategy within the 1.3090-1.3113/1.3738 trading range. The bottom of this range is under test. A sustained break below this level could pull the trigger for an additional short-term down-leg. The 1.2991 previous high is the next important support level. The targets of the multiple top formation are at 1.2835, 1.2645 and 1.2487.
On Thursday, USD/JPY trading was confined within barriers that were already in place on Wednesday. The yen recorded some limited gains in Asia and Europe, but the USD/JPY rebound later in the session supported by decent stock market gains in Europe and later in US trading. USD/JPY closed the session at 99.27, little changed from the 99.37 close on Wednesday.
Overnight, Asian stock are mixed to cautiously positive, with Japan outperforming. The Japanese eco data this morning (Tertiary industry index, consumer confidence and department more store sales) were again weak but had no impact on trading. The ruling party outlined legislation allowing the government to buy shares if share prices plunge to an extent that is considered causing an economic emergency. The stock market gains helped USD/JPY to go a few ticks up.
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. An improvement in global investor sentiment during the month March supported a second up-leg and the pair tested the key 100.55/102.20 resistance area. Additional/sustained gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) proved to be far less easy. We turned more cautious on USD/JPY short-term and advocated partial protection/profit taking on USD/JPY long positions. Currently, the pair develops a sideways, indecisive trading pattern. A sustained drop below the 98.70 area (uptrend line from the lows) could accelerate the correction.
On Thursday, the GBP-rally from the previous sessions slowed. The UK currency even faced some profit taking both against the dollar and the euro, but the move was technical in nature. There were no UK eco data. EUR/GBP closed the session at 0.8831, compared to 0.8818 on Wednesday.
Today, the UK eco calendar is again empty.
Global medium term context. The EUR/GBP pair extensively tested the key support area (0.8663/37 area previous high) early February, but the test was rejected. However, the subsequent rebound also failed to take out the key 0.9519 resistance area and over the previous two weeks, EUR/GBP was captured in an ongoing downtrend, bringing the pair ever closer to the key 0.8637 key support area. In a longerterm perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. However, we can’t ignore the strong sterling performance of late. So, we maintain our wait-and-see approach and are not in a hurry to (re-)install EUR/GBP long exposure. The euro skeptic market sentiment ahead of the May ECB meeting also leaves its trace on the EUR/GBP cross rate. The 0.8637 reaction low is the key point of reference. A sustained break below that level would force US to reconsider a long-standing positive bias in this pair.
