EUR/USD short-squeeze halts as USD is in better shape

On Wednesday, uncertainty on the intentions of the Greek government weighted on EMU peripheral bonds and on European equities, but the impact on the euro was limited. The EUR/USD short squeeze halted but there was no clear new trend. The Fed sounded more optimistic on the economy but was a bit more cautious on inflation and on the international context. The instant market reaction was limited. Later in the session, the risk-off correction continued. US bond yields, equities and oil all turned south. Remarkably, the combination of risk-off sentiment and lower US yields had hardly any negative impact on the dollar. The dollar reacted to the positive Fed assessment on the economy rather than on the inflation remarks.
EUR/USD closed the session at 1.1287 (from 1.1381). USD/JPY stayed well supported and ended the session at 117.54 (from 117.87).

This morning, most Asian indices show losses in line with the decline in the US. So, most regional markets don’t profit from the strong dollar. USD/JPY is holding in the 1.17.65 area. EUR/USD extends in decline below 1.13. The Reserve bank of New Zealand kept is policy rate unchanged at 3.5% and shifted to a neutral bias. Even a rate cut is no longer excluded. The New-Zealand dollar nosedived, losing more than one big figure. NZD/USD is trading in the 0.7320 area, near the lowest level in almost four years. AUD/USD is again under pressure, too. The pause in the decline after the publication of inflation data yesterday was short-lived. A new downleg in commodity prices is fuelling speculation that the RBA will follow the global easing trend when meeting next week. AUD/USD is changing hands below the 0.79 handle.

Today, the calendar in Europe contains the German labour market data, the January German inflation and the confidence data from the European commission. For German inflation, a negative Y/Y figure (-0.2%) is expected. For EC confidence data we see upward risk to the consensus. The data might be mixed for the single currency. However, the focus in Europe will be on the ‘cooperation’ between Greece and the E(M)U. In this respect, the position of the new Greek government is interesting as the EU foreign ministers meet to decide on new sanctions against Russia. A Greek dissent would add to the global nervousness and could be a (moderately) negative for the euro. In the US, initial jobless claims and pending home sales are on the agenda. We expect a moderate reaction as USD traders will in the first place look out to the US Q4 GDP estimate, scheduled for release tomorrow.

To summarize: the USD dollar is holding strong despite lower bond yields and risk-off sentiment due to a further decline in the oil price. Lingering tensions on Greece remain a potential negative for the euro, but in an day-to-day perspective, we expect more consolidation in EUR/USD. Further sustained USD gains against the euro might be a bit difficult in a context of lower core bond yields and risk-off equity sentiment. An outright clash between Greece and the EU is a risk scenario short-term.

In the wake of the ECB’s QE decision, we don’t row against the LT negative EUR/USD trend. A lot of investors are probably still wrong-footed by the speed of the recent decline. Upticks might still be used to buy the dollar/sell the euro. This week’s euro correction is no trend reversal yet. We stay cautious on USD/JPY even as the pair held up well yesterday. The downtrend in core (USD-EUR) yields may continue to cap the topside. In addition, at some point, Asian/Japanese equities might become nervous on the ‘competitive’ devaluations in the EMU and several other countries. A risk-off correction might bring the yen in the picture. EUR/JPY already cleared the EUR/JPY 134 support area and extensively tested the 131.22 support (Dec 2013 low + MT Neckline). Admittedly, the tension eased early this week. The comparable range bottom in USD/JPY stands at 115.57. This level is still far away, but we keep an eye on it.

Sterling stays well bid

On Wednesday, there were no eco data in the UK. For once, this inspired a calm session for sterling traders. EUR/GBP received little guidance from the EUR/USD headline pair and hovered in the higher half of the 0.74 big figure. The late session rebound of the dollar (decline of the EUR/USD) pushed the pair to the intraday lows. The pair closed the session at 0.7455. Cable initially held near the recent highs in the 1.52 area but lost also ground to the mid 1.51 area on USD strength.

This morning, the UK nation-wide housing house prices (0.3% M/M and 6.8%) were close to expectations. Later today, the CBI reported sales will be published. A sharp setback is expected after a very strong report last month. Usually, the market reaction to CBI data is much less compared to the ONS statistics. Even so, a positive surprise might be slightly supportive for sterling. A retest of the 0.74 support area might be on the cards, especially as tensions on Greece persist in the near future.