On Wednesday, investor sentiment was still positive and Tuesday’s Fed communiqué was a good support for sentiment to risk. The US central bank sounded a bit more positive on the economy, but didn’t change its commitment to leave rates low for a prolonged period of time. This gave investors in riskier assets some comfort. Of course, the Fed message was not really a big support for the US currency, either. On top of that, one should expect Tuesday’s smoothing comments of S&P on Greece (the country was removed from credit watch) to support the risk trade and even so the single currency. Stocks on both sides of the Atlantic again succeeded quite a decent performance. However, for the euro the picture was far less straightforward. EUR/USD reached a reaction high in the 1.3818 area early in European trading, but failed to build out its gains. The gradual intraday uptrend on the stock markets was obviously not a strong enough reason for the pair to go for a test of the 1.3840/50 resistance area. Already during the day, there were again press headlines indicating an ongoing rift between Greece and Germany. German Chancellor Merkel suggested European rules might need to be changed so that countries that repeatedly break the rules can be expelled from the zone. This is of course not a vote of confidence for the EU institutional framework. The ‘limited’ tightening of the Greek credit spread (the 10-year spread of Germany failed to move below the 300 bp in a sustainable way yet) suggested that the issue was not out of the way. So, EUR/USD drifted south for most of the session and touched an intraday low in the 1.3730 area late in European trading. Later in the session, some consolidation kicked in, but the EUR/USD cross rate never gave the impression being able to take any advantage from a context that, in theory, was intrinsically positive for the single currency. EUR/USD closed the session at 1.3738, compared to 1.3766 on Tuesday evening.
Overnight, there is again a lot of market chatter on the rift between Germany and Greece on a rescue plan/support for Greece. German officials are quoted as they said that Greece doesn’t need help at this stage. On top of that, Germany apparently, leaves open the option for Greece to go to the IMF for help. On the other hand, Greek officials are also warning that the country might go to the IMF if it fails secure support at next week’s EU summit. So, the political rift on Greece is again high on the agenda. This hammered the euro this morning. EUR/USD is being traded at around 1.3680 at the moment of writing.
Today, the calendar of eco data contains the EU trade data. In the US, the CPI , jobless claims, Q4 current account data, Philly Fed survey and leading indicators are on the agenda. Especially the claims and the Philly fed survey deserve some attention. However, the bickering on whether and how Europe will support Greece will most probably dominate the headlines on the financial newswires. This dispute between Germany and Greece is obviously a hardball game at the highest level. This open rift is of course no support for the single currency. So, as long as this dispute is dominating the financial headlines, the risk should be put for more pockets of euro weakness.
Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were good reasons for investors to hold back on safe haven dollar long positions. At the end of last year, there was growing evidence that the US economy was gaining traction. This fuelled market speculation that US interest rates might be raised at some point and triggered a USD shortcovering move. From that point, we were looking for clues that 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. We installed a cyclically inspired sell-on-upticks approach in EUR/USD. Since mid January, the Greek 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. EUR/USD breaking below important technical support levels was a strong technical signal, even as it was due to outright euro weakness. US data series very cautiously continued to go in our way of a cyclical USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite remained an important driver for ERU/USD trading. The EU support for Greece (without any details) to some extent eased the tensions but uncertainty still prevails. The Greek issue highlighted the weak points of the EMU framework. This continues to weigh on the euro. The rift between Germany and Greece only illustrates the institutional deficit of the single currency. The Fed maintaining its commitment to keep rates low for an extended period of time is in theory no support for the dollar. However, this looks like a story of euro weakness rather than dollar strength.
In a short-term perspective, EUR/USD has entered a sideways consolidation pattern. Quite a lot of bad news had apparently been priced in for the euro. However, for now, there are no signs of a sustained euro rebound and the European discord on Greece doesn’t suggest that a swift change for the better is in the making. So for now, we assume that the MT trend is still EUR/UISD negative.
Technical picture. Since December 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 entered a new era. The trend in this pair is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. For now, the 1.3850 area (previous high) is the first barrier on the topside. Recent price action reinforced our feeling that a (swift) return to/beyond this barrier won’t be easy. 1.3405 (62% retracement) is the first target on the EUR/USD charts. LT the 1.2886 April low might gradually come into the picture. Over the past weeks, EUR/USD settled in a ST consolidation pattern. The pair regaining the MT downtrend line since December even might be seen as ST positive for this pair. Nevertheless, for now, we don’t feel any need to change our standing EUR/USD negative bias. This remains a sell-on-upticks market. In a day-to-day perspective, we can not but put the risk for the pair to drift further south in the 1.3433/1.3850 trading range.
On Wednesday, the price moves in the USD/JPY cross rate were still confined to a rather tight sideways trading range. The BOJ taking some additional measures to support bank lending had no big impact on USD/JPY trading. USD/JPY reached an intraday high in the 90.70 area late in Asian dealings. However, there were no follow through gains. The BOJ measures (and the decent stock market performance) in theory should have been yen negative. However, on the other side of the equation, the Fed’s commitment to keep rates low for an extend period of time, was no support for the dollar. So, there was still no clear driver to guide the USD/JPY price action. USD/JPY closed the session exactly at the same level as the Tuesday close at 90.31.
Overnight, the Japanese eco data had hardly any impact on the currency market. Asian stocks are mixed, with the Japanese indices underperforming. The negative headlines on Greece might cause investors to become less inclined to hold risk and this might be (slightly) yen supportive. USD/JPY is hovering in the low 90 area this morning.
Already for quite some time we have a cautiously positive bias for USD/JPY, as we saw USD/JPY longs as a good trade to play the global recovery story. The loss of momentum on global (equity) markets since the end of January didn’t really support our case and the break below the key 88.55 support obliged us to draw our conclusions and (temporary) step aside.
With the global recovery story still on track and with the BOJ under pressure to do something on deflation, we didn’t feel any need to be engaged in yen long exposure at this stage. After the rejected test of the downside two weeks ago, the pair returned beyond the 90.00 area. This called off the downward alert. To be honest, this week’s Fed decision was no big help for our USD/JPY long call. Nevertheless, in case markets remain (cautiously) optimistic on the global recovery, we continue to see room for further USD/JPY gains. So, a buy-on-dips approach is preferred. The 92.15 reaction high is the next important target on the charts.
On Wednesday, sterling shorts were wrong-footed by a strong UK labour market report. Unemployment dropped by more than 32k in February, while a small rise was expected. On top of that, the BoE Minutes sounded a bit less convinced that inflation will indeed reverse the current up-tick as swiftly as anticipated until now. This newsflow supported sterling and EUR/GBP was hammered beyond the 0.90 mark. The euro struggling overall weighed on the EUR/GBP cross rate too. EUR/GBP closed the session at 0.8964, compared to 0.9030 on Tuesday evening.
Today, the UK calendar contains the monthly budget data, the mortgage approvals, the Monday supply data and the CBI industrial trends. It will be interesting to see whether those data will be able to reinforce yesterday’s sterling positive momentum. Recall that last month’s poor budget data added to the sterling negative sentiment at that time. Of course in a day-to-day perspective, negative headlines on Greece/Europe might continue to weigh on this cross rate, too.
Global context: During the August/mid October period, sterling showed additional losses as the BoE increased the amount of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. Recently, there were some very cautious signs that the UK economy is leaving recessionary territory, too. From a monetary policy point of view, the question is whether the UK economy has already reached the point where sterling could become a cyclical play. Early February, the BoE shifted as expected, to a sit-and-wait approach. However, its assessment on growth and inflation remains soft and this view was confirmed in the February inflation report. So, we don’t have any indication that the BoE will be a front-runner in scaling back policy stimulation when compared to the Fed or the ECB. This was the main reason why we didn’t see a case for a sustained rebound of sterling. Of course, the euro was haunted by the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continued to weigh on the EUR/GBP pair, too. Nevertheless, we held/hold on to our assessment that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.
At the end of January, the slide in EUR/GBP eased and the pair even staged a rebound and regained the 0.8834/41 resistance area. The ongoing BoE talk on the possibility of more QE ‘convinced’ markets that any interest support for sterling is still very far away. Other issues (risk for a hung Parliament) only deteriorated the fate of sterling. The rebreak of the 0.8834/41 area materially improved the picture for EUR/GBP. After the test of the 0.9154 resistance, some consolidation kicked in. Recently we had a buy-on-dips approach in this currency pair. However, yesterday’s price action suggests that there is some further room for correction in this pair. We don’t change our LT sterling skeptical attitude, but partly due global euro weakness, a return to the 0.8834 neckline area might be on the cards.
