On Tuesday, the EUR/USD pair entered calmer waters after the sell-off that resumed early last week. Stock markets continued to trade in a nervous and volatile way but after all, the decline was less sharp and this also slowed the decline of the euro against the dollar. Intraday, the euro even tried to gain some ground after the better than expected ZEW economic sentiment indicator. It hadn’t happened for quite some time that euro reacted to eco data from the EU. Nevertheless, trading in this cross rate failed to find a clear directional trend, even as stocks recouped their losses later in the session. This move came after US Treasury secretary Geithner said that most US banks have enough capital. The pair moved up and down in the 1.29/1.30 range and closed the session at 1.2948, slightly higher from the 1.2921 close on Monday.
Today, the eco calendar in European and the US is again very thin. So, global sentiment will continue to set the tone for trading. On top of that, the market debate on the ECB policy might flair up in the run-up to tomorrow’s non-monetary policy meeting.
Global context. Over the previous months the currency markets were driven by very different factors. The swings in risk appetite/risk aversion played an important role on almost all markets and the currency market was no exception to this rule. Bad news was most often dollar supportive. The euro (more or less in step with other non-safe haven currencies) received a better bid when investors turned more courageous. However, this underlying pattern was a few times interrupted by the central bankers. Mid March, the dollar faced a sharp temporary setback after the Fed’s announcement to extend its policy of quantitative easing. However, those dollar fears dissipated rather soon. After the early April ECB press conference, the euro came again under pressure. Investors scaled back euro long position as there was growing uncertainty on the non-conventional measures the ECB intends to announce at the May meeting. Markets suspect some internal disagreement within the ECB board on this item. We don’t join the analysis that the ECB is behind the curve. We believe the Bank’s more balanced approach might avoid a lot of side-affects and problems of unwinding later. Nevertheless, in a short-term perspective, this ECB uncertainty apparently is enough a reason for investors to maintain a euro cautious attitude. The gyrations in stock markets remain a wildcard also for EUR/USD trading. However, we don’t expect a major euro rebound before the May 07 ECB interest rate decision.
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 sign for the pair and forced us to change our short-term bias from neutral to negative. On Monday, the 1.2991 previous high was also broken, reinforcing the ST negative picture in this pair. Over the past days, we advocated 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 Tuesday, USD/JPY trading again more or less copied the intraday swings on stock markets. The pair hovered around the 98 mark in Asia and early in European trading, but rebounded later in the session after comforting comments from US finance minister Geithner caused US stock markets to reverse their earlier losses. USD/JPY closed the session at 98.73, compared to 97.89 on Monday evening.
This morning, Asian stock markets failed to make advantage from the rebound in the US yesterday evening. The Japanese trade balance came out marginally better than expected. As such, this is no important news. However, the fact that both the decline in exports and in imports has become slightly less negative compared to the previous month could be seen as a very cautious first signal that the downturn might slow in the near future.
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) and below the MT uptrend line from the January low. This makes the ST technical picture slightly negative. The 2nd target of the ST double formation is seen at 97.17.
On Tuesday, EUR/GBP trading initially developed in a tight sideways range between 0.8880 and 0.8915. The (core) UK CPI was slightly higher than expected, but hardly had any impact on sterling trading. Later in the session sterling again recorded some decent gains, both against the dollar and the euro. BoE’s Fisher in an appearance before the Parliament’s Treasury committee said that the £75 bn BoE asset buying program committed thus far ‘looks to me to be calibrated reasonably well’. This pushed UK yields higher. The impact of no additional BoE asset buying (especially Gilts) on sterling is less clear. However, and at least this time, sterling joined the upmove in yields. EUR/GBP closed the session at 0.8825 compared to 0.8887.
Today could be an important day for UK markets. The eco calendar contains the labour market data and the monthly public finance data. On top of that, the BOE will publish the minutes of the previous April policy meeting. It will be interesting to see whether the MPC’s first evaluation of the implementation of the March QE measures. Last but not least, UK’s Finance minister Darling will present the 2009/2010 budget. Markets will take a very close look at the financing needs of the UK government as the Budget deficit is expect to exceed 10% of GDP.
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 again 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. Since the end of last week, EUR/GBP entered a ST sideways consolidation pattern. However, for now, sterling easily managed to preserve its recent gains, ahead of today’s budget announcement. The 0.8787 ST reaction low is the first ST support. A break below this level would open the way for a retest of the key 0.8637 MT reaction low. 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. Nevertheless, the jury is still out whether this sterling rebound has already run its course. So, we are still not in a hurry to (re)install EUR/GBP long exposure.
