On Tuesday, EUR/USD extended the gains from Monday, even as the pair faced a temporary setback in Asia after the RBA decision to keep rates unchanged. There was little in the way of eco news and that was probably part of the explanation for the euro rebound. In the recent euro negative environment, no news is apparently good news. Greece spreads tightened a bit early in the session, but this move was undone later. In any case, there was/is still a lot of uncertainty on this issue going into today’s approval by the EC of the Greek stability pact. Nevertheless, Greece was not really an issue for EUR/USD trading yesterday. On the other hand, stocks entering calmer waters and even building out Monday’s gains gave the euro some additional downside protection. So, the pair trended cautiously higher within the 1.39 big figure. EUR/USD closed a rather uneventful session at 1.3965 little changed from the 1.3931 close on Monday. Awaiting the next episode in the Greek tragedy?
This morning, most Asian stocks are also in positive territory and this is helping the EUR/USD to preserve yesterday’s gains.
Today, the calendar is again more interesting. In Europe, the markets will take a look at the services PMI and, to a lesser extent the EMU retail sales. The calendar in the US is also interesting with the challenger job cuts, the ADP employment report and the ISM non-manufacturing. Markets will be quite keen the see whether these data will be able to confirm the positive US growth momentum as evidenced in the recent data publications. If so, the market reaction will be interesting, too. Will the dollar be supported by the improving US eco picture or will the euro be able to exploit declining risk aversion? We hold on to our view that markets are gradually shifting to the first option rather than returning to the second one, which was last year’s trading pattern. Aside from the data, the EU’s assessment on the Greece deficit reduction plan is of course a wildcard for euro trading. We have the impression that markets have entered a wait-and-see mode on this issue and that there is no strong drive to push Greek spreads even wider from the current levels at this stage.
Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were both good reasons for investors to hold back on safe haven dollar long positions, even more as the US dollar became a funding currency for setting up carry trades. However, the power of this trading paradigm faded at the end of last year. There was growing evidence that the US economy was gaining traction and this fuelled market speculation that the era of close-tozero US interest rates might not last till eternity. Markets contemplating that the Fed might reduce policy stimulation sooner than expected triggered a USD short-covering move. Euro negative headlines (Greece) reinforced the EUR/USD correction. From that point, we were looking for clues whether the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-distant future. The softer than expected December US payrolls report published early last month pulled some cold water on the hopes for the Fed to raise rates anytime soon. Nevertheless, we kept a cyclically inspired sell-on-upticks approach in EUR/USD. However, the Greece saga (and other intra-EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. So, we couldn’t ignore the strong technical signal of the break below the 1.4220 level, even as it was due to outright euro weakness. Last week’s Fed decision, very cautiously went in our way of a cyclically inspired USD rebound. The same applies to the US Q4 GDP release and this week’s strong ISM. So, we see this as confirming or even reinforcing our EUR/USD sell-on-upticks approach. In this framework, this week’s EUR/USD correction is only considered a technical repositioning after last week’s sharp decline. We don’t think that the euro will able to perform a sustained rebound, even not in a context where stocks would continue to move higher. So, more pronounced up-ticks are still considered an opportunity to go USD long against the euro. A sustained rebound above the 1.4100/1.4220 area would call off the short-term alert in this pair. We’re not convinced that this will occur anytime soon.
Technical picture. Last month, EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating that the EUR/USD bull-run has run its course and that EUR/USD trading is entering a new era. We started the new year with a sell-on-upticks approach for EUR/USD aiming for return action to the bottom of the 1.4626/1.4220 range. The break below this range bottom triggered a new EUR/USD downleg, making the picture for the pair outright negative. The 1.3748 June reaction low is the next high profile target/support level on the charts. We continue to apply a sell-on-upticks approach for return action to this 1.3748 target. In a tactical approach, partial profit taking on EUR/USD shorts might be considered in case of returning action to this high profile level.
On Tuesday, USD/JPY showed again a very lackluster sideways trading pattern. Trading was order driven, with no big stories able to unlock the recent stalemate. The pair traded in the 90.80 area in Asian and European trading and failed to take any advantage from the constructive stock market sentiment in Europe and in the US. Order-driven activity even pushed the pair a few ticks lower at the start of the US trading session. The moves were insignificant, but for dollar bulls yesterday’s price action only can be considered as disappointing. USD/JPY closed the session at 90.38, compared to 90.61 on Monday evening.
This morning, Asian stock markets are mostly in positive territory but at this stage it is still no big help for USD/JPY. There were no eco data on the agenda today. So, USD/JPY will again be driven by global sentiment (in particular by the market reaction to the US data). However, it is far from sure this will be enough to unlock, the current deadlock.
Global context: USD/JPY reached a correction low in the 84.83 area at the end of November. During the month of December, the pair staged a remarkable rebound. Improved USD/JPY sentiment after the better than expected US payrolls early December was enough a reason to take profit/scale down USD/JPY short exposure. End December, the pair even temporary regained the 92.50 resistance area. The new Japanese Fin Min softening its tone on the yen added to the USD/JPY supportive picture, but early January the weaker US payrolls blocked the rebound. In a medium term perspective, the December USD/JPY rebound called off the MT downtrend of the US dollar against the yen. Since the start of the new year, the USD/JPY rebound shifted into a lower gear. Recently we took a cautiously positive bias for USD/JPY. In a broader perspective, we see USD/JPY longs as a good trade to play the global recovery story. The recent loss of momentum on global equity markets didn’t really support our case. Nevertheless, as we hold on to our global positive eco view and we think the global cyclical recovery story might still turn out be USD/JPY supportive. At the end of last week, we indicated that we were looking for confirmation to see whether the 89.14 reaction low would be a good base to (re)install/add to USD/JPY long positions. The reaction to the Q4 US GDP figure and to the US ISM was constructive but far from spectacular. We maintain a cautious buy-on-dips approach. However, tight stop-loss protection is warranted. A sustained drop below the 89.14 short-term low would suggest that the correction has some further to go.
On Tuesday, the rebound in EUR/GBP that started at the end of last week ran into resistance. Early in the session, the EUR/GBP still joined the EUR/USD rebound. However, the pair failed to take out Monday’s highs and the move stalled. We didn’t see much high profile news to explain the price action. Traders are probably moving toward more ‘neutral’ positioning going into tomorrow’s BoE meeting. EUR/GBP closed the session at 0.8742, compared to 0.8730 on Monday evening.
Today, UK calendar is quite interesting. Overnight, the Nationwide consumer confidence improved from 70 to 73. BRC shop prices rose 2.3% Y/Y (from 2.2% M/M in December). Those data give sterling some support in Asia this morning. Later today, the PMI for the services sector will be published. The figure is expected to show a strong growth momentum (56.5) as did the manufacturing measure earlier this week. Recall, the reaction of sterling to this strong manufacturing measure was (surprisingly) non-existent. Of course, today market talk will already look forward to tomorrow’s BoE meeting. We expect more wait-and-see behaviour going into this meeting.
Global context: During the August/mid October period, sterling showed additional losses against the euro as the BoE extended its policy of quantitative easing through a rise in its program of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. EUR/GBP settled in a 0.8830/0.9154 sideways trading pattern. Recently, there were some cautious signs that the UK economy is leaving recessionary territory, too. From a market point of view, the question is whether the UK economy has already reached the point where sterling could become some kind of a recovery play. Until now, we considered it is too early to conclude that recent signs of improvement will be enough for the BoE to scale down policy stimulation (or raise interest rates) in the foreseeable future. We also didn’t see any signs yet that the BoE will be more proactive in scaling back exceptional policy measures/policy stimulation compared with the ECB (or the Fed). This week’s BoE policy meeting (when a new inflation report will be available) will be the next point of reference for BoE policy.
We started the year with a neutral bias for this pair with range trading in the established 0.8834/0.9155 preferred. Global euro weakness due to worries on the Greek budgetary situation, has overthrown this strategy. The pair dropped below several key support levels, forcing us to leave our longstanding EUR/GBP positive (de facto sterling cautious) attitude. The picture in EUR/GBP turned negative and the 0.8400 August reaction low came again in the picture. Looking at the eco fundamentals, we have the impression that the correction (sterling rebound) has gone far enough. However, this is obviously not a good enough reason to row against the EUR/GBP negative tide, yet. Nevertheless, we stay alert. The consolidation at the end of last week/ early this week is first indication that the rebound of sterling against the euro is loosing momentum. We assume more technical trading/consolidation going into tomorrow’s BoE meeting.
