On Monday, EUR/USD extended the decline that already started last week. However, this time the explanation for the slide was different. Last week, investors sold the euro as there was some uncertainty on the ECB policy measures that will be announced at the May policy meeting. On Monday, global investor sentiment took a Uturn. Stocks were heavily sold and this helped the dollar to profit from its safe haven status. Initially the euro losses were still rather contained. Nevertheless, the pair gave away the 1.2990 support area in Asia. The sell-off temporary slowed in Europe but a new selling wave occurred after the open of the US stock markets. The pair even temporary tested offers below the 1.29 mark, but closed the session at 1.2921, compared to a close of 1.3044 at the end of last week. So, while the correlation between stock market indices and EUR/USD had been far less tight over the previous weeks, the theme apparently still plays some role at times of more elevated market stress.
Today, the ZEW economic sentiment will be published. Markets will also take a look at the interest rate decision of the Swedish Riksbank. The later could be interesting as it will be seen as a potential input for the ECB policy assessment ahead of the key May meeting. The ZEW is expected to mirror the recent improvement in investor sentiment. However, we doubt that this will be enough to change the course of events on global markets in general or on the currency market in particular. The uncertainty on the ECB policy and the gyrations on the stock markets will continue to be the key drivers for trading. With respect to the first item, we don’t expect any new signals ahead of Thursday’s non-monetary policy meeting (ECB’s Papademos presents the annual report to the EU parliament late today). Stocks record losses of between 2% and 3% this morning in Asia. However, given the sell-off in Europe and in the US yesterday evening, the damage could have been even worse. If the decline slows, this could also give the euro some downside protection.
Global context. EUR/USD bottomed out mid February. The market focus on the intra- EU tensions eased and the Fed steps of quantitative easing announced at the March meeting 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 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. The announcement at the April ECB press conference that the bank will decide on non-standard measures at the May meeting has gradually become a factor of uncertainty for the single currency, especially as the markets suspect some internal ECB debate on this item. We don’t join the analysis that the ECB is behind the curve and think that the more balanced approach from Trichet and co might avoid a lot of sideaffects and problems of unwinding later. Nevertheless, in a short-term perspective, this ECB caution apparently is seen enough a reason for investors to scale back euro long exposure. We still don’t see any reason for major euro sell-off, but the risk is for the single currency to fight an uphill battle until this factor of uncertainty is solved. On top of that, the ECB (and the European export industry) is probably not really unhappy with a slightly weaker 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. A first test of the 1.31 support area was rejected two weeks ago but at the end of last week, the bottom of the 1.3090-1.3113/1.3738 trading range has been broken. This was a short-term negative for the pair and forces us to change our short-term bias from neutral to negative. Yesterday, also the 1.2991 previous high was broken, reinforcing the ST negative picture in this pair. We started the week with a sell-on upticks approach. We maintain this bias. The targets of the multiple top formation are at 1.2835, 1.2645 and 1.2487.
On Monday, the yen strengthened across the board. The correction on the stock market supported the Japanese currency. On top of that, short-term investors also took profit on yen-funded carry trades in several cross rates. USD/JPY drifted south throughout the whole trading session and close the day at 97.89, compared to 99.16 on Friday evening
Overnight, most Asian stock markets recorded quite some decent losses. However, most indices including the Nikkei recouped part of the earlier losses and this also blocked the rebound of the yen. Markets also kept a close look at the 20-year government bond auction. However, at least for now investor fears were not justified as the sale met decent investor demand.
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. The pair currently trades below the neckline of a short-term double top (99.31). The 2nd target of this formation is seen at 97.17.
On Monday, the U-term in global market sentiment also affected sterling trading. The UK currency showed quite some impressive gains over the previous weeks, but the change in global market sentiment was also a good reason to cash some gains on this sterling rally. The better than expected Rightmove house price index was not able to prevent this profit taking move. Aside from the global market context, investors also keep an eye on the UK Budget plans. UK Chancellor of the Exchequer Darling will reveal its budget plans tomorrow. EUR/GBP rebound from the 0.88 area in Asia to 0.89 area around noon. The pair then settled in a sideways range and closed the session at 0.8887, compared to 0.8827 on Friday.
Today, the UK CPI data will be published. While interesting, we don’t expect them to contain any key info for the currency markets. BoE’s Fisher will testify to the Treasury Committee in the UK Parliament. On top of that, markets will continue think about the consequences of tomorrow’s UK budget announcement. Those plans will probably imply a steep rise in bond issuance during the fiscal year 2009/10. The room for additional budgetary stimulus will be limited. In this context, it is a bit difficult to see this announcement bringing any supportive news for sterling.
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 weeks, EUR/GBP was captured in an ongoing downtrend. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. However, we couldn’t ignore the strong sterling performance of late. On top of that, this sterling strength was supported by a rather poor performance of the euro overall. Yesterday’s EUR/GBP rebound could be a first indication that the sterling rebound is losing momentum. We still want some more confirmation on this move. Investors turning their attention the to UK budget rather than to the uncertainty ahead of the May ECB meeting, could help to give this pair some downside protection. 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. For now this is still not our preferred scenario.
