EUR/GBP sets now correction low after Greek election

(Currency) markets react cautious to Greek election result

On Friday, the market repositioning after the ECB’s QE announcement continued. On the currency market, EUR/USD but also EUR/JPY headed south at an impressive pace. USD/JPY is struggling too, but stayed in well-known territory (118 area) for most of the day. A poor stock market performance later in the US session triggered some dollar selling. EUR/USD rebounded in the 1.12 big figure. USD/JPY closed the week below 118. However, the basic trend on the currency market remained euro weakness.

During the weekend, the focus of the markets turned to the outcome of the Greek elections. Left-wing Syriza just fails to secure an absolute majority. Even so, the party will put its request for debt reduction on the table in negotiations with Europe. This might cause institutional uncertainty on the political scene in Europe. Even so, the first reaction in Asia is moderate. EUR/USD set a new correction low in the 1.11 area. However, the loss compared to Friday’s close is already reversed. EUR/USD is again trading in the 1.12 area. A similar reaction is seen in several Asian equity markets and in USD/JPY. The pair touched a risk-off correction low in the 117.3 area early in the session but is rebounding to the 118 area. In an interview in Davos, BOJ’s Kuroda suggested that the Bank has still several options to ease policy further if necessary. Those comments might have prevented a further yen strengthening at the start the new week. Japanese trade data were stronger than expected.

Today, there are no eco data on the calendar in the US. The focus will be on Europe. In Germany, the IFO business climate indicator will be published. A further rebound is expected and we see risks for a consensus-beating outcome. It is not evident to see the impact on the single currency. A positive outcome should in theory be positive for equities. However, of late there was often an inverse correlation between equities and EUR/USD. How will the arrow work this time? For now, we don’t expect a big/lasting impact from the IFO on the euro. The focus of markets will be on the political developments in Greece. In this respect, there will be a lot of comments on the election outcome on the side-lines of the meeting of the Euro group Finance Ministers. In a first reaction, one can expect that most other EMU countries will insist that Greece will have to comply with the current agreements. However, should this really be a surprise for markets? We also keep an eye at the reaction of the European equity markets. A moderately negative reaction is possible. However, will this hurt the euro and trigger additional losses? As said, this would break the recent inverse correlation between European equities and the single currency. A substantial widening of intra-EMU bonds spreads could do more damage for the euro. So, we start the day with a rather neutral bias for EUR/USD. This morning’s price action at least suggests that further euro losses in the wake of the Syriza victory are no done thing.

In the wake of the ECB’s QE decision, our strategy was not to try to catch the failing knife in EUR/USD even as technical indicators pointed to heavily overbought conditions. We hold on to that view for now. A lot of investors are probably still wrong-footed by the speed of the recent decline. So they might still try to limit the damage in case of an uptick. So, we have to wait for more concrete signs on a real bottoming out process before considering a change in tactics on EUR/USD. For USD/ JPY we maintain a cautious bias. The ongoing downward pressure on yields in most industrialised countries may continue to cap the topside. In addition, at some point, Asian/Japanese equity markets might become nervous on the competitive declines/ devaluations in the rest of the world. A risk-off correction for this or whatever other reason might bring the yen in the picture. EUR/JPY already cleared the EUR/JPY 134 support area and is extensively testing the 131.22 support (Dec 2013 low + MT Neckline). The test is ongoing, but there is no sustained break yet The comparable range bottom in USD/JPY stands at 115.57. This level is still quite far away, but we keep an eye on it.

EUR/GBP sets now correction low after Greek election

On Friday, the EUR/GBP cross rate was still captured in a negative tailspin. First, the post-ECB sell-off euro continued unabatedly. In addition, the December UK retail sales were again much stronger than expected. A new, this time sterling-inspired, selling wave kicked in. EUR/GBP soon changed hands below the psychological level of 0.75. The decline of EUR/GBP slowed during the afternoon, but the pair struggled to regain the 0.75 level. Compared to the wild swings in EUR/GBP, the moves in cable were remarkably moderate. The pair largely decoupled from the EUR/USD decline. The pair closed the session marginally lower in a daily perspective (1.4989compared to 1.5010). Today, only the BBA loans for house purchases are on the agenda in the UK. This is no market mover. In line with the first reaction of EUR/USD, EUR/GBP set a new correction low just north of 0.74 this morning, but the early losses are reversed. The price action in EUJR/GBP will probably remain in lockstep with the EUR/USD. For cable, more consolidation near the recent lows is on the cards.