Due to technical problems this report will be available next Monday
On Wednesday, EUR/USD trading again showed no clear direction. There were no important eco data in Europe or in the US and the stock markets showed a choppy trading pattern, too. EUR/USD dropped temporary below the 1.29 barrier at the start of European trading, but this test of the downside was soon reversed. The euro even gained some traction during the US trading hours and despite a late session correction on the US stock markets, EUR/USD closed the session at 1.3005, compared to 1.2948. Nevertheless, in a broader perspective, the single currency is still in a consolidation pattern close to the recent lows.
Today, the eco calendar in Europe and in the US is better filled compared to the previous two days. In Europe, the first PMI business confidence indicators and the industrial orders are on the agenda. In the US, the weekly jobless claims and the existing home sales will be published. On top of that, the ECB holds its non-monetary policy meeting. For once, the European data might have (slightly) more potential to move the markets compared the US ones. Earlier this week, the ZEW came out better than expected and if this signal would be confirmed by today’s European confidence indicators, investors might turn somewhat less negative on the EU outlook going forward. Yesterday, the IMF painted a gloomy picture on the European economy and urged to European policy makers to do more to address the crisis. This IMF assessment had no big impact on the euro, but some good (less negative) news might give the single currency some downside protection, too. Nevertheless, global uncertainty still remains a (negative) factor for the single currency. The uncertainty on the outcome of the US stress tests for banks could hamper the ST upside for global stock markets and thus also for the euro. The debate on the ECB non-conventional measures is another source of euro skepticism. In this respect, we look out for any hints from ECB members after today’s non-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 for 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. 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 but at the end of last week, the bottom of the 1.3090-1.3113/1.3738 trading range was broken. This break was a short-term negative sign for the pair and forced us to change our short-term bias from neutral to negative. Over the past days, we advocated a sell-on upticks approach. Yesterday, the euro showed some tentative signs that correction might be slowing. Nevertheless, it is too early to call off the downward alert. So, we maintain our ST EUR/USD negative bias. The targets of the multiple top formation are at 1.2835, 1.2645 and 1.2487. Sustained return action above the previous lows (1.31 area) would be a first indication that the decline is losing momentum.
On Wednesday, the dollar showed some consistent trading pattern in different cross rates. However, in USD/JPY the pressure was still slightly to the downside. Technical considerations probably continue to play a role as the pair recently dropped below some ST support levels. Stock markets were not rally able to give USD/JPY trading a clear guidance. USD/JPY closed the session at 98.01, compared to 98.73 on Tuesday evening.
This morning, there were no eco data with market moving potential. Asian stocks again showed a mixed picture, with the Japanese indices in positive territory, but outperforming the rest of Asia. This gave USD/JPY some downside protection this morning.
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 difficult. 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. For now, we still put the risk for the correction to go somewhat further.
On Wednesday, the main point of the economic news flow was in the UK and this was also visible in sterling trading. Sterling showed quite some wild swings intraday. The UK currency was sold ahead of the Budget announcement. The mid morning data were mixed with the labour market data slightly better than expected, but the monthly budget data worse than expected. The minutes of the previous meeting brought no new insights. The first results of the implementation of the measures of quantitative easing were seen as cautiously positive. Sterling continued to lose ground after those publications.
In its budget statement, Chancellor of the Exchequer saw the economy contracting by 3.5% this year but expected a return to a growth of 1.25% next year. Darling forecasted a net borrowing of 12.4 % GDP but projected the budget deficit to decline to 5.5% of GDP by 2013/14. Sterling continued to trade very volatile during his appearance before parliament but finally sterling was sold again and EUR/GBP rebounded above the 0.89 mark. The Chancellor of the Exchequer saying that “a competitive change rate will help exporters” was at least part of the explanation for this sterling selling wave. The high level of public sector borrowing for sure also played a role. On top of that, investors apparently doubted whether those budget forecast were really realistic and achievable. So, EUR/GBP settled in the 0.8975 area after Mr. Darling’s speech and closed the session at 0.8975, compared to 0.8825 on Tuesday.
Today, the UK calendar contains the CBI industrial trends reports. It will be interesting to see whether this indictor shows first signs that the downturn in the UK economy might be slowing. If, so sterling might recoup at least part of yesterday’s losses.
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. Yesterday’s rebound might be a first indication that the downside in this pair might become better protected. Even as that move was in line with our long-term fundamental view, we don’t cry victory yet. The pair holding above the 0.8915 area (neckline hourly double bottom) would be a constructive signal. The 0.8787 area is still the first MT point of reference. 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
